Millions of retired workers would be given the power sell their pensions, under major plans to relax annuity rules being drawn up by ministers.
Reforms announced in last year’s Budget will mean working people who retire in future will be able to cash-in their pension savings for a lump sum which they will be free to spend as they wish.
But an estimated five million pensioners who have already retired will miss out because they are locked into their contracts until they die.
Steve Webb, the Pensions Minister, told The Telegraph he wanted to change the law to enable these pensioners to sell their annual lifetime incomes – known as “annuities” – to the highest bidder at any time after they have retired.
Pensioners may decide they would rather have cash than a guaranteed income stream to give money to children, to pay for home renovations or to invest.
The plan will be particularly appealing to those who have more than one pension as a result of working for several employers, and who would prefer to have money “up front” than to receive a small amount from a low-value pension each year.
The reform would also create a new market in “second hand” pensions, as insurance firms and other companies buy up individuals’ annuities, bundle them together and sell them on in bulk.
Mr Webb said he had been urged by pensioners to introduce the reforms, while several major pensions companies and insurers had also expressed “considerable interest and enthusiasm” for the plan.
“I want to see people trusted with their own money wherever possible,” he said. “I have already heard from people around the country who would like to see this change made.
“I want to see if we can get these freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum.
“No-one would be obliged to do so, but for those who would prefer up-front capital to regular income, I can see no reason why this should not be an option.”
An estimated 400,000 people who retire each year use the money they have saved while working to buy an annuity – an insurance product which pays an annual income for the rest of their lives.
For many people, it is the biggest financial decision they will ever make. However, in recent years annuity rates have plunged, trapping many pensioners in poor-value schemes that have destroyed the value of their lifetime savings.
The annuities market has also been criticised for exploiting people’s confusion about the complicated arrangements by hitting customers with “shocking” annual fees, and putting people off “shopping around” for the best deal when they retire.
The problem has become particularly acute after the demise of final-salary pensions in the private sector, which do not require people to buy annuities.
Mr Webb’s plan follows the most radical pension reforms in decades. Under measures announced in last year’s Budget, workers will be given the power to take their lifetime savings in cash when they retire, instead of being forced to buy an annuity, from April this year.
However, millions who have already bought annuities will miss out. In some cases, they will have bought their annuities relatively recently and most will have done so because they had no choice.
Mr Webb said: “The Budget freedoms for people who have yet to use their pension pot have been widely welcomed.
“But the millions of people who have already been forced to buy an annuity are so far missing out on these new freedoms and many feel aggrieved.
“I have heard from people around the country who would like to enjoy similar freedoms to the freedoms set to be enjoyed by those who have yet to crystallise their pension savings.
“As things stand, once an annuity is in payment there is very little that an individual can do if they would prefer instead to have a cash lump sum or some combination of cash and reduced income.
“But, given that we now accept that individuals should be given more control over their retirement savings, I would be concerned if we were to exclude up to five million people who are currently receiving annuity income.”
According to latest figures from the pensions industry, there are about six million pension annuities currently being paid, worth about £11 billion each year.
As some pensioners will have more than one policy, the Department for Work and Pensions estimates that this means up to five million people are now receiving pension payments through annuity schemes in retirement.
Under the minister’s plan, the annuity pension would continue to exist but once they had been sold, payment would be re-assigned from the original pensioner to another account holder, most likely to be an insurance company or pension fund. The pension would continue to pay out until the original owner of the policy dies.
Mr Webb, a Liberal Democrat, hopes to launch a public consultation and publish an agreed Coalition plan setting out the reforms in detail before the general election in May.
He said he would seek cross-party support from Labour in order to ensure that the reforms can be implemented early in the next parliament, whichever party wins the election.
Mr Webb said the reform would require changes to “ancient” laws governing the insurance industry, in order to allow people to sell their annuities. It would also require the Treasury to decide how cash sales of pensions would be taxed.
Protections would need to be included in the package to prevent pensioners – especially the very elderly – being ripped-off if they choose to trade in their annuities for cash. But there are already strong signs that pension companies would welcome the reforms, he said.
Pension funds and insurance firms would be very interested in acquiring guaranteed income streams that are linked to people’s longer lifespans, he said.
“I have discussed this idea with a number of major players in the industry and there is considerable interest and enthusiasm for taking it further,” Mr Webb said.
“It is possible to imagine, for example, a market in second-hand annuities with perhaps some financial institutions buying them from individuals and bundling them up to sell on in bulk.”