Chancellor George Osborne said he had taken the step to up the pension market because he wanted to trust pensioners with their money.
Life offices and annuity providers have seen their share price hit by the announcement. Partnership Assurance was down 24 per cent at 2.10pm, while Just Retirement had fallen 31 per cent. Resolution was down over 4 per cent on the news while L&G had fallen 6.7 per cent.
As an interim measure, introduced from March 27, 2014, the income requirement for flexible drawdown will be reduced from £20,000 to £12,000 and the capped drawdown limit will be raised from 120 to 150 per cent.
The size of the lump sum small pot is increased five-fold to £10,000, while the trivial commutation limit is being doubled to £30,000 in the short term.
Osborne said: “Most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years.
The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots. I reject that. People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances. And that’s precisely what we will now do. Trust the people.
“I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots.
“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.
“And we’re going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.
“Those who still want the certainty of an annuity, as many will, will be able to shop around for the best deal.
“I am providing £20 million over the next two years to work with consumer groups and industry to develop this new right to advice.
“When it comes to tax charges, it will still be possible to take a quarter of your pension pot tax free on retirement, as today.
“But instead of the punitive 55 per cent tax that exists now if you try to take the rest, anything else you take out of your pension will simply be taxed at normal marginal tax rates – as with any other income. So not a 55 per cent tax but a 20 per cent tax for most pensioners.
“The OBR confirm that in the next fifteen years, as some people use these new freedoms to draw down their pensions, this tax cut will lead to an increase in tax receipts.
“These major changes to the tax regime require a separate Act of Parliament – and we will have them in place for April next year.”
Society of Pension Consultants president Roger Mattingly says: “This is a breath of fresh air for pensioners and those approaching retirement. The Chancellor has woken up and smelt the coffee, delivering one of the most refreshing Budgets for pensioners in recent times. In one fell stroke he has broken down the barriers to the customisation of individual benefits for those living in increasingly modern circumstances.
“With these new freedoms, however, the need for advice will be greater than ever before. The key to the successful roll out of these plans will be the continued development of a professional, affordable advisory system where advisers truly put the interests of their clients at the heart of all their decision-making. The scope to advise in a superficial and formulaic way no longer has a place in society.”