The pensions minister Steve Webb has proposed that pensioners with existing annuities should be allowed to sell them in exchange for a cash lump sum.
It comes after a series of pensions reforms - due to be introduced in April 2015 - aimed at people approaching retirement.
In an interview with the Sunday Telegraph, Webb said he is concerned that the forthcoming reforms omit people who have already retired, who will not enjoy the same freedoms as those set to retire imminently.
His solution is that retirees should be able to sell their annuity contract to the highest bidder, in return for a cash lump sum. This would allow retirees to manage their pension cash in a way they believe will provide them with the highest income.
They could, for example, invest the cash and draw an income from it. Or they might invest some of their cash and part-annuitise the rest – giving them the same options that will be available to those due to retire from April 2015.
Webb told the paper: "I want to see people trusted with their own money wherever possible. 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."
The move would suit, in particular, people with lots of pensions pots who would prefer to trade the smallest of them for lump sums rather than continue receiving a number of tiny, annuitised payments.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the reform would be a vote-winner but is unlikely to ever work.
He explained: "There is an obvious appeal in finding a way to extend the pension freedoms to existing annuity holders, giving them the option to take their money back as a lump sum if they want. There is overwhelming support for the new pension rules and with an election looming, unlocking these existing contracts would be a vote winner.
"It is to the government's credit that they are continuing to seek new ways to reinvigorate the retirement savings sector and to encourage investors to take control of their own money; we just don't think this latest idea will ever work. Similar schemes using life insurance contracts in the past were labelled by the Financial Services Authority as 'high risk, toxic products.'"
McPhail suggested there were two ways the government could introduce such reforms. The simplest is a system where the annuity holder and insurance company agree to cancel the contract and the investor is paid a lump sum by the annuity provider. However, this depends on both parties agreeing to a fair price.
Alternatively, a second option would be to allow annuity holders to sell their policy to a third party in exchange for a lump sum - similar to the way "life settlements" work in the US.
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