The government will scrap the rule which creates an effective obligation to purchase an annuity by age 75.
In a document published alongside today's Budget, the government said it would scrap the so-called age 75 rule from April 2011.
It said a consultation on the detail of this change would be launched shortly.
The government said legislation for transitional arrangements for those who will reach 75 in the meantime - and are yet to secure an income - would be included in the Finance Bill after the Budget.
HM Revenue & Customs said these transitional arrangements would increase to 77 the age by which members of registered pension schemes have to buy an annuity or otherwise secure a pension income - adding this change would also apply for the purposes of the inheritance tax charges that specifically apply to pension scheme members aged 75 and over.
It said these interim changes would allow those reaching age 75 on or after today's Budget to defer their decision on what to do with their pension savings until after the new rules are finalised next year.
Prior to this anyone reaching age 75 either had to purchase an annuity or else go into alternatively secured pension.
Withdrawals from a pension pot under ASP are subject to strict Government Actuary's Department rules determining the minimum and maximum amount to be taken. On death any remaining sum could attract tax charges of anything up to 82% unless the sum is passed on to a dependent or else left to a charity or political party.
For those reaching age 75 after June 22, the minimum and maximum limits on income withdrawals will apply from their 77th instead of their 75th birthday. In the interim period lump sum death benefits will also attract a 35% tax charge if the pensioner dies on or after 22 June 2010 and aged 75 or over.
Standard Life senior pensions policy manager Andrew Tully said: "We believe these are positive steps that will help overcome some of the objections that people raise about saving for retirement.
"The current rules dissuade some people from saving in a pension and Standard Life believe that a simple rise to age 80 or 85 will satisfy the majority of people who are constrained by the current rules.
"The rate of tax deducted when passing on pension benefits at death is also excessive at 82% and we hope this will be reviewed."
AllianceBernstein head of DC research and design David Hutchins added: "The additional flexibility that an end to compulsory annuitisation will bring to individuals saving for retirement should be welcomed. Few countries outside of the UK insist on individuals using their entirely voluntary pension savings to purchase an annuity, with the vast majority of all such annuities in the world being purchased in the UK"
Despite this, Hutchins warned: "We would encourage the government to avoid the complex rules and regulatory requirements that have often accompanied attempts at bringing such greater flexibility in the past. While this has been a significant benefit to the pensions industry and financial advisers it has as a result left savers worse off and often excluded the valuable benefits of flexibility from the less well off - an approach which is akin to keeping the poor poor."
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