Annuity rule goes as Treasury promotes more flexible pensions

But pensioners will need pension pots worth at least 20,000 a year to take advantage of the greater flexibility, according to details within the draft of the 2011 Finance Bill.

The minimum income requirement has been introduced as a safety net to prevent people from using their retirement savings too soon and burdening the state.

Experts welcomed the greater flexibility, hoping more people will be encouraged to save for retirement.

Helen White, acting director of life and savings at the Association of British Insurers, said: "The new flexibility will allow pensioners to take their retirement income in the most appropriate way for their own circumstances."

She added the minimum income requirement would "protect people from depleting their pension pots and falling into poverty unnecessarily".

Under current rules, the 7.8 million people who are currently saving through defined contribution pensions and those with personal pensions must use their savings by the time they are 75 to buy annuities that then provide them with income for the rest of their lives.

But the rule was introduced in 1976 – when the average man who had reached the age of 65 was expected to live for only another 13 years.

Now, men aged 65 who are in good health can expect to live for another 21 years, while women survive for an average 24 years more.

Government plans to enable people to work on past the default retirement age also mean that having to buy annuities by the age of 75 is likely to be unsuitable for more people.

The Treasury said that as many as 200,000 people use income drawdown arrangements for retirement.

Officials say the number could be "considerably larger" if people are not forced into buy annuities by the time they are 75.

They added that the government is putting in place measures to ensure the change does not lead to tax avoidance or that pensions become a tax-privileged way of passing on wealth.