Annuities: pension savers prevented from turning small annuities into lump sums

Pension providers failing to let savers to convert small annuities into lump sums, even though Government rules allow this.

Pension firms are refusing to allow savers to turn small annuities into lump sums, despite the Government wanting this to be an option, it has emerged. 

It’s not exactly uncommon for pension savers to purchase an annuity that has a relatively small value.

Indeed, data from the FCA shows that over the last decade almost 100,000 savers bought an annuity with a value of less than £10,000.

While that might have seemed a good idea at the time, circumstances change and savers may now feel they are getting little practical benefit from the regular payments offered by the annuity and instead want to take a lump sum.

After all, if you have an annuity worth a couple of thousand pounds then you may be able to put a lump sum of that value to greater use than the £50 or so you may receive from the annuity every couple of months.

According to the Government rules, this should be an option too, with savers permitted to take that money as a lump sum rather than rely on regular payments. 

The trouble is that just because the rules say it should be possible, that doesn’t mean it actually is, since very few annuity providers allow you to do so.

An investigation by Sun Money found that some of the biggest pension firms in the country ‒ the likes of Aviva, Canada Life, Scottish Widows and Legal & General ‒ do not allow customers to turn annuities into lump sum payments, in any circumstances.

Do I want an annuity?

Annuities have long been a central part of pension planning for many people.

An annuity is effectively an insurance product, which you purchase using your pension pot.

The annuity then delivers a regular income to you until you die.

The selling point here is clear. Just as during your working life you enjoy a regular, stable income, making it easier to budget your spending.

There’s certainty there in that you know what you’ll be getting each month, with no risk of running out of money at any point as may happen if you attempt to just dip into your pension savings as and when needed during retirement.

Annuities fell out of favour significantly following the introduction of the pension freedoms, while the low interest rates on offer made them far less tempting for those looking to maximise value from their pension pots.

However, annuities have become more appealing once more as rates have grown, with some pension firms reporting sales are now at the highest levels seen since the freedoms were introduced.

Check out our guide to buying an annuity.

I need the money now

The last few years have put all of our finances under greater pressure.

From the pandemic to the cost of living crisis, many of us have seen our money stretched in ways we had not previously experienced.

For example, food price inflation hit levels unseen since the mid-1970s earlier this year, making trips to the supermarket ever more punishing.

When we face money pressure in this way, many of us take a look at where the cash is coming in and where it’s going out, in the hope of making some positive changes.

And while cutting spending is an obviously attractive move, so too will be revamping your income in some way. 

If you can turn that barely noticeable couple of pounds that pops up in your account every few months into a lump sum, that could mean clearing off a debt in one go or paying for installing a new boiler which might result in cheaper energy bills.

So it’s little wonder that there are some pension savers who can see the chance to boost their finances through turning a mediocre annuity into a lump sum.

Yet pension firms have evidently decided against offering something that is supposed to be possible.

Clearly this isn’t a decision that should be taken lightly.

Giving up a lifelong drip-fed income for a lump sum is a big move if the sums involved are significant, but when we are talking about what is effectively a few points then savers should be given the flexibility they need when accessing their cash. 

For pension firms to essentially lock the money away from savers without good reason is hugely unfair, when it’s the savers themselves who suffer.