Chancellor George Osborne has announced sweeping changes to the taxation regime for defined contribution pensions in today’s Budget speech.

Osborne announced the requirement to purchase an annuity will be lifted. From next April, DC savers will be able to draw their pensions from age 55 by drawing it as a lump sum or using an income drawdown arrangement regardless of the size of their pot.

People aged 55 and over will only pay their marginal rate of income tax on anything they withdraw from their DC pension above the 25 per cent tax free pension commencement sum – either 0 per cent, 20 per cent, 40 per cent or 45 per cent.

As a “first step” in introducing the reform, a number of taxation changes will take effect from 27 March.

The amount of guaranteed income people need in retirement to access their savings flexibly will be cut from £20,000 to £12,000. Total pension savings that can be taken as a lump sum will be increased from £18,000 to £30,000.

Capped drawdown withdrawal limits change from 120 per cent to 150 per cent of an equivalent annuity, and the maximum size of small pots which can be taken as a lump sum will be increased from £2,000 to £10,000. The number of personal pots that can be taken under these rules from increases from two to three.

Announcing the changes, Osborne said the reform was “the most far reaching reform to the taxation of pensions since the regime was introduced in 1921”.

A consultation has been launched on the changes.

Pension providers are to be required to ensure everyone retiring with a DC pension receives free and impartial face-to-face guidance on the choices they face when deciding how to use their retirement savings.

New "pensioner bonds" are also to be introduced. For people aged 65 or over, the Budget announced that National Savings and Investments will launch a choice of two fixed-rate bonds, available from January 2015.

The exact details of the bonds will be finalised in the autumn. However the government’s current assumption is that NS&I will offer products which would pay rates of 2.8 per cent gross/annual equivalent rate on a one year bond and 4.0 per cent gross/AER on a three year bond under current market conditions, with an investment limit of £10,000 per product. These will be taxed in line with all other savings income.

Osborne also announced an increase in the personal allowance value to £10,500 from £10,000 from next year.

The Chancellor said the changes would take place from April 2015.

Last year, Deputy Prime Minister Nick Clegg called for an increase in the personal allowance value to £10,500 from April 2014. It is currently scheduled to increase from £9,440 to £10,000.

Further, as part of the Liberal Democrats’ election policy, Clegg wishes to eventually raise the personal allowance to £12,500.

Experts said an increase to the personal allowance could result in as many as three million people being excluded from the automatic enrolment process.

The current earnings threshold for auto-enrolment is set in line with the personal allowance, meaning everyone earning in excess of £9,440 is currently eligible for auto-enrolment.

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