Last checked at 
* UK to scrap requirement for pensioners to buy annuities
* Britons to face lower penalties for using savings early
* Finance ministry sees little immediate market impact
* Industry levy to fund free guidance for pensioners (Updates with announcement, Treasury on likely market reaction)
By David Milliken and William James
LONDON, July 21 (Reuters) - Britain published new rules forprivate pensions on Monday which give retirees greater freedomto spend their savings as they like, fleshing out reformsannounced earlier this year that shook the share value ofBritish insurers.
Finance minister George Osborne caught Britain's pensionsindustry by surprise in March when he scrapped a rule forcingpeople to buy an annuity, a financial product which converts aretiree's pension pot into a guaranteed retirement income.
Osborne is keen to allow people to tap into the cash theyset aside during their working life by reducing tax penaltiesimposed on those who withdraw their savings in a lump sum.
He wants that change to drive innovation in the 12 billionpound ($21 billion) per year British annuity market.
To accompany the reforms, he also wants to make freeindependent financial guidance available.
On Monday, the government confirmed its intention to goahead with such plans, seen as the biggest reform of pensions ina generation, and added details to its proposals following aconsultation with industry, employers and consumer groups.
"It's right to support hard working people that have takenthe long-term decision to save for their future and I'm pleasedthat the responses we had to our proposals on making pensionsmore flexible have been overwhelmingly positive," Osborne said.
The finance ministry estimated the changes could affect 18million people, but said it expected the impact on financialmarkets would be modest.
"The government believes that the overall impact ... islikely to be limited," it said. "It is expected that there willstill be a strong continuing demand for high-qualityfixed-income assets, including government and corporate bonds."
Osborne rejected the idea that the changes would allowpensioners to fritter away their savings early in theirretirement and later suffer an impoverished old age.
INSURERS IMPACT
The reform plans have raised questions over how insurerswill be affected by a dip in demand for annuities if there is nolonger a requirement for retirees to buy them.
When Osborne first announced the shake-up earlier this year,it hit the share value of firms like Legal and General,Aviva and Standard Life who run annuitiesbusinesses.
Those shares have since recovered slightly, but remain belowtheir pre-announcement levels.
The price of long-term British government bonds,which are used by annuity providers to manage risk, fell afterthe initial announcement in March.
But the finance ministry said that after consultation, theindustry estimated that only 10-20 percent of people indefined-benefit pension schemes would transfer out of them.
Some pension schemes might need to hold more liquid assetsas a result, however.
The consultation response includes outlines for new annuityproducts which allow early lump-sum withdrawals and regularpayments that vary over the lifetime of the product to meet thedemand of retirement expenses such as care costs.
Annuities will also be allowed to provide a guaranteedpayout, even if the recipient dies, for much longer than thecurrent 10-year limit.
A summary of the consultation said the financial guidanceprovided to retirees would be provided independently and fundedby a levy on regulated financial services firms. ($1 = 0.5851 British Pounds) (Additional reporting by Andy Bruce; Editing by Andrew Heavens)
