An employee benefits consultant says Legal & General's decision to raise its minimum fund requirement for annuity purchase from £1,000 to £5,000 could hit tax-free cash and block the open-market option.
Standard Life is now the only provider to accept applications for open-market annuities for values under £5,000. Its minimum is £2,000.
Jardine Lloyd Thompson says around 6 per cent of annuities it placed last year were for funds below or around £2,000.
It points out that members of self-administered money-purchase schemes with low fund values may find their tax-free cash entitlement reduced due to them having to leave a residual fund of at least £2,000 so an annuity can be placed.
It says trustees of defined-benefit schemes could find themselves having to take on board extra liabilities where members' additional voluntary contribution funds are less than £2,000.
The problem does not exist where pension funds are already invested with an insurer as the fundholder can buy an annuity with that provider.
JLT annuity services manager Nick Eade says: “Members with fund values of £2,000 will be unable to benefit from the open-market option and will have to rely on rates offered by the holding insurers.
“Is this the start? If Standard Life follows suit, there may be an increasingly bigger gap between maturing funds and the amounts that insurers are willing to take.”
Standard Life spokeswoman Patricia Corrigan says: “We keep an eye on the £2,000 limit but we have no plans to move it at present.”