Chancellor George Osbourne has announced plans to abolish the so-called death tax on pensions.

The current 55% tax on pension funds when somebody aged 75 or over dies will be scrapped in April 2015, one month ahead of the general election. Relatives will only pay tax at the marginal rate and no tax will apply to the relations of people who die aged under 75.

All defined contribution pension schemes will be affected by the change, including most auto-enrolment schemes. Approximately 12m people in the UK currently save into such pensions, and – according to the Association of British Insurers (ABI) – 400,000 people already use them to provide an income.

"People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free," Osbourne said.

"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."

Ros Altmann, the pensions expert and Government adviser for older people, said: "This is another great piece of news for pension savers. Instead of having to pay a punitive 55% tax charge, they will be able to pass on any money left in their pension funds tax free to their loved ones."

The National Association of Pension Funds (NAPF) said the announcement was a natural follow on to the freedom and choice initiative mapped out by the Chancellor in his March 2014 budget but said more people would be affected by the new Guidance Service.

Joanne Segars, NAPF chief executive, said: "While it may encourage some people to save more into their pensions, the reality is that this is likely to affect only people with larger pension pots."

Segars went on to emphasise the importance of making sure the planned Guidance Service is in place ahead of all planned reform and implementation of changes.

"The proof of all these reforms will be in their implementation and how they affect savers and voters. With less than 140 working days until the service must be up and running, the clock is ticking," she said.


First published: 02.10.14

lindsay.sharman@wilmington.co.uk