Pensioners looking to cash in their retirement annuity under plans set to come into force next year could be at risk of making a bad decision over its true worth, the Institute for Fiscal Studies (IFS) has warned.

The Government recently announced plans which will give f ive million people who have bought an annuity the right to sell the income they receive from it from April 2016.

The changes, which are subject to a consultation, would enable people to sell the income they receive from their annuity if they can find a buyer, without unwinding the original annuity contract.

The annuity provider would continue to make payouts, but the payments would be reassigned to the purchaser of the annuity.

The IFS think-tank said on the face of it, the announcement provided "a welcome liberalisation of the market".

But it warned there could be significant problems in setting up a market for second-hand annuities and "a more serious" issue could arise from people's potential inability to make a well-informed decision about whether or not they should sell their annuity.

It said: "Evidence suggests that at least a significant minority of annuity holders - in particular older annuity holders - may struggle with the complex decisions required in valuing their annuity compared to an alternative lump sum.

"This suggests that, at the very least, individuals will need to have access to good quality financial advice and guidance in order to navigate this new market - if, indeed, such a market does spring into existence."

Traditionally, when people with a defined contribution (DC) pension have retired, they have used their pension pot to buy an annuity, which guarantees them a regular retirement income, usually until death.

Currently, people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or as much as 70% in some cases.

The Government has said it will remove this charge, so that people are taxed only at their marginal rate.

Estimating the average value of an annuity currently being paid out, the IFS said this was around £26,000.

Annuities become less valuable the older someone becomes, as they have fewer years' worth of payouts left to go.

One in four annuities in payment are estimated to be worth less than £11,000, while one in four are thought to be worth more than £61,000.

Looking at the potential market for selling annuities, the IFS said the prices on offer could assume that those looking to sell were likely to die soon and these prices could therefore be unattractive to many potential sellers.

While women tend to live longer than men, annuity purchasers may not be allowed to take this into account by using gender to vary prices, meaning the annuity market could be particularly unattractive to women, the IFS said.

People trying to sell on their annuity income are likely to know much more about their personal lifestyle, such as how healthy their diet is and how much alcohol they drink, than the potential buyer does, which could also limit the market, the think-tank said.

Looking at how capable people are at making a good decision about their annuity, the IFS said some annuity holders may not be well-placed to make "complex" calculations about the worth of their annuity compared with a lump sum, without proper advice or guidance.

It said the English Longitudinal Survey of Ageing found that while less than 2% of annuity holders aged under 75 years old reported having difficulty managing money because of a physical, mental, emotional or memory problem, this increased to nearly 10% of annuity holders aged 85 and over.

Separate research has also suggested that people are strongly influenced by the price they are first offered for their annuity, the IFS said.

Research found that people who were initially offered a lower price tended to end up selling for a lower price than those who were first offered a higher price.

While annuities help to prevent people running out of money during their retirement, they have also been controversial in recent years, due to plunging rates and people not shopping around to get the most suitable annuity deal for their needs.

From Monday, reforms aimed at people aged 55 and over will mean that they no longer have to buy an annuity at all with their pension pot.

Instead, they will be able to take their pot how they wish, subject to their marginal tax rate.

The changes planned for next year will give people who have already bought an annuity an opportunity to take part in the retirement revolution.

For the great majority of customers, selling an annuity will not be the right decision, the Government has said.

But in certain circumstances, people may want to sell one on to provide a lump sum for relatives, to pay off debts, to purchase a more flexible income or due to a change of circumstances, such as a divorce.