Annuity sales dropped 16 per cent during 2013 as insurers reported an increase in the number of people deferring purchase.
The pensions industry is under pressure to reform after an FCA review revealed 80 per cent of consumers who do not shop around could have got a better deal if they did.
The regulator also concluded that people with pension funds worth less than £5,000 are poorly served by the market.
Analysis from the Association of British Insurers, published this week, reveals 353,000 annuities worth £11.9bn were sold during 2013 – down from around 420,000 in 2012.
The trade body says the proportion of annuities bought on the open market remained static at 48 per cent last year, although this figure has increased significantly from the 31 per cent reported in 2003.
The proportion of internal annuities that were medically underwritten rose to 8 per cent in Q4 last year, compared with 4 per cent in 2012.
Hargreaves Lansdown head of pensions research Tom McPhail says: “The retirement income market appears to be shifting, with demand for annuities collapsing and surging interest in drawdown.
“There are lots of factors at work here, including the wider economic background, sentiment about future interest rates and actual retirement ages. Low annuity rates in recent years compared to historic averages may have had an impact too.”
Investment Sense marketing manager Phillip Bray says: “Annuity sales may have been artificially high in 2012 as a result of the gender directive, but this could also indicate that more people simply cannot afford to retire.”