The way annuities are sold is being investigated by the City regulator, the Financial Services Authority (FSA).
Annuities are the annual pension that many people buy with their private pension pots when they retire.
The FSA will look at whether or not people are given enough encouragement and information to shop around.
The long-standing worry has been that people get a bad deal by just taking the annuity offered by the insurer which has been investing their money.
The FSA made it clear that there was a problem that needed investigating.
"An annuity purchase is an important one-off decision that has long term consequences for individuals if they get it wrong," said Nick Poyntz-Wright of the FSA.
"We want to understand the level of the potential detriment for consumers if they do not shop around to see if there are ways to make this market work better for consumers."
Last year, the National Association of Pension Funds (NAPF) complained that the way annuities are sold might be costing half a million retirees each year as much as £1bn in future pension income.
It pointed out that the failure of someone to shop around - or being unaware they were able to do so - might reduce their annual pension income by a third.
The insurance industry then agreed to reform its practices, and in March this year insurers will have to conform to new guidelines set down by the Association of British Insurers (ABI).
These will require insurers to:
- Provide clear and consistent information, including details on how to shop around for an annuity
- Highlight the details of enhanced annuities - the higher pension income available to those with shorter life expectancy
- Signpost customers to external advice and support that is available
- Give a clear picture of how their products fit into the wider annuity market.
However, the FSA is clearly not satisfied that this will go far enough and wants, initially, to estimate how much people are losing in potential income.
Tom McPhail, of annuity firm Hargreaves Lansdown, pointed out that insurers have been obliged since 2002 to draw their customers attention to the fact that they can shop around for an annuity at the point of retirement.
"The ABI code of conduct is a big step forward, however it is flawed in that it could result in insurers performing a very limited shopping around process for their customers," he said.
"This could result in investors getting a slightly better deal than they would have done in the past, but still not as good a deal as if they shopped around the whole market.
"Hopefully the FSA review will determine whether the ABI code of conduct is acting effectively to improve consumer outcomes," he added.
Lack of knowledge
Hargreaves Lansdown said that, according to industry figures, 399,000 new pension annuities were sold in 2011 by insurance companies.
The average sum used to buy one was £27,600, and the difference between the best and worst income offered after shopping around was between 10% and 20%.
Billy Burrows, of the annuity broker the Better Retirement Group, said: "It is all very well encouraging people to shop around, but many people do not know what they are shopping for.
"Getting the best rate is just the tip of the iceberg because they are many important issues below the waterline which if ignored could have a bigger detrimental effect on annuity income than not getting the absolutely best rate."