From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract, in an extension of reforms announced a year ago.

This will give these pensioners the same options as those announced in Budget 2014 for savers who reach retirement with a pension pot. Both those who have taken an annuity and those approaching retirement will have the freedom to use that capital as they want.

The new flexibilities are due to come into effect on 6 April, and allow people to make their own choice about what they do with their savings in retirement. This could include being able to draw down from their defined contribution pension pots incrementally or taking their pension as a lump sum.

George Osborne said: ‘There are five million pensioners who are locked into annuities they have already bought. They should have the same freedoms as we have given everyone else.

‘For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose - the same freedom we are offering those approaching retirement in April this year.’

Currently people wanting to sell their annuity income face a 55% tax charge, or up to 70% in some cases. Under the new rules, they will be taxed only at their marginal rate.

The government is to launch a consultation on the measures that are needed to establish a market to sell and buy annuities. The Treasury said its approach fully recognises the contractual agreements between the annuity holder and the annuity provider, and does not unwind those contracts.

Instead it allows the annuity holder to access the value of their property rights where they can find a willing buyer. The annuity provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.

The proposals will not give the annuity holder the right to sell their annuity back to their original provider, and the government says it is ‘not minded’ to allow the original annuity provider to purchase, and then discontinue, their own customers’ annuities.

The government expects that obtaining the right to annuity payments could be attractive to a broad range of institutional investors and will be consulting over who should be permitted to purchase the annuity income. It also intends to look at widening the remit of the new PensionWise free advice service to support those who may be considering selling an annuity.

The consultation on widening the market for purchasing annuities will be published alongside the Budget on 18 March.