Warning for thousands of pensioners over access to retirement cash – is your pot affected?

ALMOST 100,000 pensioners with less than £10,000 saved could be blocked from cashing in their plans and only allowed to take tiny regular payments, an investigation by Sun Money has found.

Annuities are retirement plans that pensioners can buy to get a fixed regular income for the rest of their life.

Government rules say savers with annuity plans worth less than £10,000 should be allowed to take their money as a lump sum if they want to.

This can be useful for those with smaller pots as the plans aren’t providing much income, but a one-off sum could pay for something more meaningful like a holiday, car or home improvements.

But although HM Revenue & Customs (HMRC) rules allow it, pension providers aren’t required to offer the option – and Sun Money has found that hardly any do.

Data from the FCA shows that at least 96,000 pensioners bought an annuity with a value of less than £10,000 in the last decade and could therefore find themselves unable to cash in their plans.

Four of the UK’s biggest pension firms, Aviva, Canada Life, Scottish Widows and Legal and General, all told the Sun they currently don’t allow this in any circumstances.

ReAssure, another firm, confirmed it used to allow it in some cases but has recently removed the option for all customers.

In 2017 Phoenix Life, another major pension firm, wrote to 20,000 customers with annuities paying less than £300 a year offering them the option to cash them in.

But the Sun has learned it now only allows this in very specific circumstances – for example where a customer is considered financially vulnerable –  and Standard Life, a subsidiary of Phoenix, also very rarely allows it.

Can’t cash in

Retired print worker Laurence Gott, 76, decided to cash in his annuity with ReAssure as he was receiving just £189 a year after tax – or around £47 every three months.

He wanted to use a larger lump sum to put towards a cruise for him and his wife of 53 years, Anna. 

But he was shocked when ReAssure told him it had recently removed this option for customers, meaning there was no way for him to access his money.

Laurence, from Haverhill in Suffolk, said: “ReAssure must have to pay a disproportionate amount on administration costs, so I thought it would benefit both of us for me to get a one-off payment. It doesn’t make sense.”

Tom Selby, head of retirement policy at broker AJ Bell, said: “You can sympathise with the frustrations of anyone who has an annuity paying an income of just a few pounds a week who may feel they can get more use out of a larger one-off payment.

“For example, anyone with large debts could be better off if they can settle these quickly.”

However, he explained that the cost of living crisis will have meant more customers are asking to cash their plans in, which may be why firms no longer allow it.

A spokesperson for Phoenix told the Sun: “Small pot encashment can be a complex decision for people that requires comprehensive information to be made available, along with all the necessary support.

“Very careful consideration also needs to be given to all regulatory aspects.”

The spokesperson added that providers have to pay particular attention to new Consumer Duty rules from the financial watchdog, the FCA, which require firms to ensure all products meet customers’ needs and offer fair value.

Mr Selby added: “The watchdog is placing a big emphasis on value for money in financial services with its new Consumer Duty.

“If firms don’t feel they could offer value for money deals to annuity customers selling their guaranteed incomes, then they may feel little option but to stop offering the service.”

A spokesperson for HMRC said: “Pension tax rules allow individuals to take a variety of pension payments where the amount does not exceed £10,000, referred to as ‘small lump sums’ or ‘small pension payments’.”

What is an annuity?

An annuity is a type of retirement product you can purchase with the money from your pension pot, which pays you a guaranteed income for life.

When you purchase an annuity, you can opt to take 25% of your pension pot as a tax-free lump sum.

The remainder is then converted into a taxable lifetime income.

The amount of income provided depends on a number of factors including the size of your pension pot, your age and your health and lifestyle details.

Annuity rates are also closely linked to interest rates.

Rates have been low over the last decade or so as interest rates have been at rock bottom.

But they’ve been increasing lately as the Bank of England has been hiking base rate – most recently to 5.25%.

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.

Plus, you can join our Facebook group to share your tips and stories