Chancellor George Osborne is abolishing the 55 per cent inheritance tax that applies to defined contribution pension pots left by those aged 75 or over, and to pensions in drawdown.
The BBC reports that in his speech to the annual Conservative party conference in Birmingham today, Osborne will say that when the deceased is 75 or over, beneficiaries will only have to pay their marginal income tax rate at the point they take money out of the pension.
Access to pension pots of those who die under 75 will be tax-free, including if the pension is in drawdown.
The changes will come into effect next April.
The Treasury, which has been reviewing the tax since the Budget, estimates it will cost £150m a year and affect 320,000 people – meaning a tax windfall of almost £500 per person. The Autumn Statement will set out how the policy is being funded.
Osborne will say: ”People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax-free.
“The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax-free.”
Hargreaves Lansdown head of pensions research Tom McPhail says the changes will make annuities even less attractive and coudl boost funding of long-term care.
He says: “These changes to the tax rules will be a mixed blessing. They will encourage investors to take the maximum possible advantage of their pension contribution allowances, which is certainly a good thing.
”Investors can build up their pension fund, secure in the knowledge that they can not only draw on their savings without restriction from age 55 but in addition, any unused savings can be passed on to their inheritors tax-free on death.”