The Financial Services Authority (FSA) slammed 40% of funds for providing “weak” and “insufficient” advice to policyholders about their options to go elsewhere to purchase annuities. Insurers were given six months to comply with the rules or face a possible fine.

Just over half the industry charged 10% more than the cheapest annuity rates available, according to an FSA survey of 55 firms. The report also found a gap of about 20% between the top and bottom annuity rates, contradicting earlier figures from the Association of British Insurers.

In a speech, the FSA's Sarah Wilson said that policyholders were “getting a misleading view [that] could lead them to underestimate the value of the guaranteed annuity rate and choose an option where it would be lost”.

Just Retirement, an annuities provider, said pensioners could be missing out on more than £500m a year through poor advice and a lack of access to better options.

David Cooper of Just Retirement said: “Up to 40% of people with medical or lifestyle conditions that may affect life expectancy could be entitled to an enhanced annuity up to 37% higher than would be available from their existing fund.”

Nigel Callaghan of Hargreaves Lansdown, an adviser, said: “We are confident the FSA means business. This is a wake-up call.”

Separately, the European Commission and the government reassured the industry that automatic enrolment into group personal pensions would be allowed after compulsory personal accounts are introduced.

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