God is Love. If annihilating people was more loving or merciful than allowing them to go to Hell, God would annihilate them, for He is perfectly loving.
It’s also worth considering that suffering is most definitely not the worst evil. In fact, in Hell, the suffering is not evil at all- the sinners are.
The worst evil is the destruction of the image, presence or life of God, for that is the only worthwhile substance in the whole created order. That which comes from God and is united with God or reveals or reflects God is worthwhile.
This presence of God is the most glorious and beautiful reality, the most righteous reality, and it gives all creation meaning. Suffering may be less tolerable to us because we prefer evil to suffering. That is a fault in our perspectives, an inability to value sufficiently what God has given us. But destruction of the image of God is worse than suffering.
To annihilate us would be to destroy the last of the image of God in us, for we are made in the image of God. Our reason, our existence, our eternal nature, our possession of bodies and souls, all these are beautiful images of God. Destroying them would eradicate all good that remains intrinsic to our design. Allowing them to become sources of our own destruction because we chose to make them so, in defiant resistance of His will, is just. And leaving us conscious, that the image of God may continue to be revealed in us, is loving, for it leaves the beauty of His creation in us not completely effaced. We may not appreciate this love as we should because we often value what we want or feel like having above the beauty and glory that really gives life and existence meaning. We would probably prefer to be annihilated than damned, but this does not mean annihilation would be better for us, for annihilation would efface the last glory and beauty God has given our souls.
It is more just that we be left with the consequences of our actions and choices, and it is also more loving, for God values what really has value more than He does what we through flawed desire wish for ourselves. Our reason, bodies, souls and eternal nature have value and spiritual dignity and beauty. To efface them with annihilation would be to destroy the last of Himself from us, would be worse than Hell’s suffering because it would make us less like God, completely separate from that which is Real, for all reality flows from Him.
We are allowed to deprive ourselves of all goods to our souls and bodies, but we are not allowed to deprive ourselves of our souls and bodies. This is one last evil God does not allow us to do ourselves.
To prefer annihilation to eternal suffering shows that our values are flawed, for it reveals how little we value what God has given us. It shows how what we want is more important to us than what really has value, which is all that is of God.