Five million people who've already bought and locked into an annuity will be given the same pension freedoms as people nearing retirement, the Government has announced.

Annuities have been the focus of growing controversy in recent years amid plunging rates, and fears that many people are unaware that they could possibly get a better deal by shopping around rather than sticking with their existing pension provider.

In last year's Budget, the Government announced radical reforms to pension savings, which will take place from 6 April this year. Under the changes pensioners will no longer need to buy an annuity, which is where you get a guaranteed income for retirement – see the Budget 2014: Radical reforms to give greater access to pension savings MSE News story for more information.

But the Government has now gone one step further and announced that from April 2016, it will remove restrictions on buying and selling existing annuities.

It is launching a consultation on this reform on Wednesday 18 March alongside the Budget, and it's expected the law will change from 1 April 2016. However the plans may not go ahead if a new Government is formed after the General Election.

The Government says that for the majority of customers, selling an annuity will not be the right decision. However individuals may want to sell an annuity to provide a lump sum for relatives or dependants, pay off debts, in response to a change in circumstances, for example getting divorced or remarried, or to purchase a more flexible pension income product instead.

In order to ensure people are in a position to make an informed decision, the Government will be work with regulator the Financial Conduct Authority to introduce appropriate guidance and will consult on the extension of Pension Wise – the Government's free service to help people understand how to use their pension pot – to support annuity holders considering whether to sell their annuity income.

What's the current system?

At retirement you can draw money from your pension pot or sell the cash to an insurance company in return for a regular income until death, called an annuity. See's Pension need-to-knows guide for the 15 key points for retirement saving.

But currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge. In some cases this is increased to 70% as annuity providers can charge customers an additional 15% tax on top of the 55% charge.

What's the Government proposing and how will it work?

Under the Government's plans annuity holders will still be able to sell their annuity where they can find a willing third party buyer, but importantly the tax charge will be cut from April 2016 so people selling their annuity are only taxed at their marginal rate.

The annuity provider would then continue to pay the annuity payment for the lifetime of the annuity holder, but these payments would be reassigned to the purchaser.

However the proposals will not give annuity holders the right to sell their annuity back to their original provider.

'People should be trusted with their own pension'

Chancellor of the exchequer George Osborne says: "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.

"So 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."

Beware of pension scams

The news comes as a campaign launches today urging pension savers to "scam-proof their savings". The Pensions Regulator hopes to alert retirement savers and pension scheme trustees to the risks of people being tricked out of their money by cold calls and texts promising a "free pension review" or mentioning a "legal loophole".

The campaign warns that scammers will try to flatter, tempt and pressure victims into transferring their pension fund into an investment with attractive and often unrealistic returns. Once the victim has signed the forms and the transfer has gone through, they are unlikely to see their money again and they could be left with a hefty tax bill.

Additional reporting by the Press Association.