Phoenix Life is offering a select group of clients the option to cash in their annuities for a taxable lump sum.
The provider will write to about 20,000 people asking them if they want to convert their income for life to a one off payment.
Eligible annuities will pay out no more than £300 a year and will generate a lump sum of no more than £2,000.
For very small pots the minimum Phoenix will pay out is £100.
Eligible considered will be between 55 and 85 years old and will have bought their annuities before the government’s pension reforms took effect in April 2015.
Phoenix said it wants to give its clients an option they would otherwise not have had.
It said it would offer its clients an amount that would reflect the potential future benefits that might be expected under the policy with money being taken from the reserves set aside by the firm for the various policies.
Each customer will get an offer based on their individual circumstances, taking into consideration life expectancy and any promises written into the annuity contract.
Danny Dowd, head of retirement propositions, said: “We recognise that many of our customers have annuities which provide very small regular income payments. This scheme offers them a choice which they will unlikely have had before – to take a one-off lump sum now or continue to receive their annuity payments.”
The pension freedom reforms introduced in 2015 eliminated the need to buy annuities for many people with smaller retirement savings for the first time.
However, those who had converted their pensions before the new legislation came in missed out.
The government considered introducing a secondary annuity market for a brief period, which would have allowed people to sell their annuities on, but it later backtracked, saying it feared the consumer protections required could prevent many providers joining the market.
Phoenix is making the offer under existing ‘Small Pot’ legislation, meaning other providers could follow suit at any point.
The insurer had already carried out a similar exercise back in 2013 involving about 7,000 clients.
The project saw two-thirds of clients written to take up the offer.
Phoenix too is making savings from people converting their small annuities, as admin costs are eliminated for those clients, it said.
Mr Dowd said: “Offering customers the option of taking a one-off lump sum is a win-win situation. It offers customers a greater degree of control, but also enables us to free up resources that go into administrating small annuities.”
Phoenix will start to invite clients to submit the claim forms from November 2017, allowing them six weeks to consider whether to take up the offer. The last letters will be sent in April.
Customers who want to continue with their annuity will be able to do so uninterrupted without incurring any charges or changes being made to their policies, the provider said.