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.
Phoenix is also referring clients to free guidance provider The Pension Advisory Service (Tpas) should they require any further help with their decision.
The provider said it had taken it a while to work out how to design the scheme to ensure it was clear to customers what they were giving up in return for the cash.
The provider’s books are well suited to making such an offer as they include a large number of clients with small annuities, whereas other providers may have more larger pot clients, Phoenix said.
A spokeswoman said: “It’s quite a big piece of work for an insurer to do and we have quite a large book of customers with smaller payments.
“[Whether others should follow suit] very much depends on the nature of their client book.”
Aviva said it was not planning to offer the option to its clients due to client protection issues.
A spokesperson said: “We remain of the view that cashing in annuities would not represent a good outcome for customers for a number of reasons. We do not therefore offer customers the option to cash in their annuity.”
But Hunter Wealth Management director William Hunter said although he was not in favour of introducing a secondary annuity market because of the risks involved he did not think the same applied to very small annuities.
He said: “How much is a client really at risk with that sum of money?”
“It’s a good idea, less than a pound a day is not a life-changing amount of money but a few thousand pounds today could help someone.”
Standard Life (now Standard Life Aberdeen) will also not be offering the option.
A spokesperson said: "Prior to the pension freedoms introduced in April 2015, customers typically had an option to take cash benefits if their pension fund met either the 'triviality' or 'small pot' requirements. Many people chose to do this rather than purchase an annuity.
"Companies may offer to buy back very small annuities under some circumstances – but annuities are generally written and priced on the understanding that they provide a customer with an income for life without the option to surrender.”
carmen.reichman@ft.com
