Five million pensioners will be able to cash in their annuities for a lump sum payment from April 2017, the Treasury has confirmed.
The change, announced following the completion of a consultation launched earlier this year, will put existing pensioners on the same footing has new retirees who have been able to take a cash lump sum since April.
Economic Secretary Harriett Baldwin said there would be a comprehensive consumer protection package to ensure people make informed decisions about their retirement savings.
It will include a requirement for people to seek independent financial advice before selling annuities worth above a set value.
"For most people, sticking with an 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 gave people approaching retirement in April this year," Ms Baldwin said.
"People who've worked hard and saved all their lives should be trusted to make the right decision for them and with the help of the regulator we will ensure these people have the right information to do that."
The plans will not unwind the contracts made between annuity holders and their providers.
Instead, the changes will allow annuity holders to access the value of their annuity where they can find a willing third party buyer. The annuity provider would continue to pay the annuity payments for the lifetime of the annuity holder, but the payments would be transferred over to the new buyer.
Annuities have been controversial in recent years due to plunging rates and concerns that people were not shopping around for the best deal. But the regular income that they provide acts as a guarantee that the annuity holder will not outlive their savings.
Gareth Shaw, head of consumer affairs at Saga Investment Services, said: "Thousands of people who receive minimal income from annuities they were forced to buy will benefit from these new rules.
"Research carried out by Saga found that 58% of people who wanted to sell their annuity were receiving such a small income they could do nothing meaningful with it."
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: "This is welcome confirmation of a widely expected announcement, which will now give millions more pension investors greater flexibility over their retirement income.
"Selling a guaranteed income will not be right for many people. Access to market competition to secure the best price and suitable information, guidance and advice should help to ensure that ordinary investors are protected and can make the best possible use of their money."
Yvonne Braun, director of long-term savings policy at the Association of British Insurers (ABI), also said that selling an annuity is not something that should not be done rashly.
She said: "It's therefore essential we see Pension Wise guidance made available to cover this future market, and we support the extension of the requirement that customers get financial advice when the value of their annuity is above a certain level.
"Getting the framework absolutely right to provide protection to consumers will be crucial if we are not to store up significant problems for the future."