Pensioners will be allowed to withdraw money from their pots in stages while retaining tax advantages, Chancellor Gorge Osborne has said.
From April 2015, savers will be able to make withdrawals from their pension savings whenever they choose, with 25% of the sums taken being tax-free, it was announced today.
Those who want to take their pension as a lump sum at present can have 25% of their pot tax-free but must place the remainder in a drawdown account from which any money subsequently taken out is taxed at their marginal rate.
Under new proposed rules, savers could withdraw a series of lump sums, with 25% of each tax free and 75% taxed at their marginal rate, but without having to have a drawdown account.
The reform follows on from Osborne's Budget announcement earlier this year that pensioners will no longer be required to purchase annuities.
He said: 'People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan.
'For some people an annuity will be the right choice whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown.
'We've extended the choices even further by offering people the option of taking a number of smaller lump sums.'
Responding to the announcement, Gareth Connolly, the chair of the pensions board at the Institute and Faculty of Actuaries said the changes were a further step in the most revolutionary changes to UK pensions for over a century.
'The new flexibility will offer people the opportunity to take retirement income in new ways according to their specific circumstances. The Institute and Faculty of Actuaries recognises the benefits that many people will gain from these landmark reforms.'
He said it was essential that that those who offer advice, or guidance, to new pensioners make them fully aware of these financial implications of decisions to access pension savings, as increased flexibility must go hand in hand with increased personal accountability.
'Average life expectancy has been increasing at more than two years a decade so people are surviving to ages which were previously regarded as unlikely.
'Average life expectancies are also just that: half will die sooner; half will die later. The financial implications of running out of money in later life could be significant. New pensioners must be aware of this risk to their standard of living - particularly with increased potential long term care costs to bear.'
Commenting on the change, Morten Nilsson, chief executive of pensions provider NOW: Pensions, said the various changes announced by Osborne were 'taking the industry into uncharted territory - a case of pensions, but not as we know it.
'While many of these reforms are welcome and long overdue, the government needs to remember the fundamental purpose of pension saving - to provide an income in retirement for however long you live.
'A balance therefore needs to be struck between flexibility and responsibility.'