Pension reforms will end 'annuity by age of 75' rules

But new rules are likely to be introduced to prevent people from using up all of their retirement savings too soon and becoming a burden on the state.

The Government, which launched a consultation on the reforms yesterday, hopes that giving people greater flexibility over the way they use their pension will encourage more people to save for their retirement.

Under current rules, the 7.8 million people who are currently saving through a defined contribution pension and those with a personal pension have to use their pension pot to buy an annuity, which provides them with an income for the rest of their life, by the time they are 75.

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.

Today, men aged 65 who are in good health have a further 21 years of life expectancy, while women have a further 24 years.

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

However, the Government said a number of changes would have to be made to pension tax rules if the need to buy an annuity by the age of 75 was removed, to make sure the move did not lead to tax avoidance, or pensions becoming a tax-privileged way of passing on wealth.

Safeguards would also have to be put in place to ensure people did not run out of money and become dependent on the state, such as placing limits on the amount people could withdraw from their pension each year.

The consultation will also consider how the reforms may affect the annuities market and whether it will affect the rates providers are able to offer.

The UK has the largest annuities market in the world, with 450,000 annuities worth nearly 11bn sold during 2009.

Financial Secretary to the Treasury Mark Hoban said: "This consultation puts forward reforms that will replace outdated and overly complex pensions tax rules with a new system that gives individuals greater freedom and choice."

The consultation will run until September 10 and the final measures should come into force from April next year.

Maggie Craig, of the Association of British Insurers, said buying an annuity was the right choice for most people and it was vital any new measures protected the principle that pension savings were primarily to provide retirement income.