The government plans to remove the restrictions on buying and selling existing annuities from April 2016 to extend its pension freedoms to five million people who have already bought an annuity.
The proposed legislation is aimed at allowing pensioners to sell on their annuities, with the returns then allowed to be taken as a lump sum or placed into drawdown.
Under the plans, selling an annuity will not unwind the contract. Instead, the provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.
Currently, people wanting to sell their annuity to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this, so people will be charged at their marginal rate.
The government will publish its consultation on how to establish a market for buying and selling annuities on 18 March, and will work with the Financial Conduct Authority to introduce appropriate guidance and other protection measures.
Chancellor of the Exchequer 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.
“I am going to change the law to let that happen, and make sure we have the right guidance in place.
“People who’ve worked hard and saved hard all their lives should be trusted with their own pension.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, added: “Unlocking an annuity in exchange for cash is bound to appeal to some people who want either a lump sum now or the flexibility to dip into their pension pot at will.
“There are significant practical obstacles to overcome and this scheme may never get off the ground, however the consultation presents an opportunity to explore whether it is possible.”