The Government confirmed the proposal yesterday after much speculation it would be part of this week's Budget – the final one before the General Election.
The move has been described as an extension of the freedoms offered by last year's reforms, which will take effect next month.
The Coalition said from April 2016 it would remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract. Pensioners will then have the freedom to use that capital as they want. A 55% - 70% tax charge will be removed, so people are taxed only at their marginal rate.

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Andrew Tully, pensions technical director at MGM Advantage, said: "This idea is full of pitfalls and is a potential minefield. There are significant risks and two wrongs won't make a right. Being sold a poor value annuity and then being offered a poor value cash lump sum, which is taxable, will not address the issue of an inappropriate original sale.
"There is a significant amount of moral hazard to. If the person was originally sold a poor value annuity and could have got a better rate because of a health condition, or smoked, and subsequently decides to cash in, the buyer will check the health of the person and decide how long the income they are buying, in exchange for a cash sum, will last."
He said, however, he could see the appeal and had a "huge amount of sympathy with people in that position".
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "The new pension freedoms are immensely popular with pension investors coming up to retirement, so it is hardly surprising the Government is looking at ways to extend them to those already in retirement too.
"Unlocking your annuity in exchange for cash is bound to appeal to some people who want either a lump sum now or the flexibility to dip into their pension pot at will.
"There are significant practical obstacles to overcome and this scheme may never get off the ground, however the consultation presents an opportunity to explore whether it is possible."
John Perks, managing director of LV= Retirement Solutions said: 
"LV= is supportive of the proposal, although it will not be an easy thing to do and we need to be mindful of the possible dangers for customers. Cashing in and spending an already poor value annuity will only worsen an existing problem.
"Likewise cashing in a good value annuity could also cause customer detriment. However, as part of the pension freedoms, it makes sense that all retirees should have the opportunity to achieve a better income outcome."