The Institute for Fiscal Studies has warned the expansion of pension freedoms to existing annuity holders may not be enough to generate a secondary market.
Chancellor George Osborne confirmed a consultation on the plans yesterday as part of the Budget, but the think-tank warns it may prove challenging to generate a marketplace.
IFS director Paul Johnson says: “There is a classic adverse selection problem here. Who is most likely to want to cash in their annuity? Someone who now knows they don’t have long to live.
“How much will they get for their annuity? Not much. What might annuity companies assume about anyone wanting to cash in? That they have reason to believe they won’t live long. How much will they get paid for their annuity? Not much.”
The Chancellor also took the opportunity to reduce lifetime tax-free savings limits for pensions from £1.25m to £1m, echoing a similar proposal from the Labour party.
The IFS says: “While a reduction in the lifetime limit is less problematic than reductions in annual limits and rates of relief (as proposed by Labour) there are better ways to reduce tax relief for pensions in particular by reducing the extraordinarily generous treatment of employer contributions by the NI system.”