The tax, which was flagged up in last autumn’s statement as too high and considered further for review in this year’s spring Budget, will be implemented in April next year, the chancellor said in his keynote speech.
Under the new rules if the person who dies is 75 or over, beneficiaries will only pay their marginal tax rate, typically 20%, when they draw down the income, as they would with any pension. But if the person who dies is under 75, there will be no tax to pay at all.
The chancellor told party member delegates that "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.”
But Neil Chadwick, technical manager at RL360°, said that although the rate of tax may have changed, “it could be viewed as a 'stealth' windfall tax going forward with those nominated as beneficiaries are more likely to cash them in and pay the tax”.
He added that “whilst all the pension changes are clearly grabbing the headlines, you do wonder what the Government is going to do about non-residents. Are they going to allow them to liberate their pension benefits free of tax as non-residents or will we see a new withholding tax introduced?”
However Mark Sanderson, chief operating officer at Brooklands Pensions, took a more upbeat view: “We think this is more positive news for pension savers as it will remove the pressure on savers to withdraw as much of their pension fund as they can before age 75 and they will therefore now feel much more confident about using their pension schemes for retirement and succession planning.
“This clarifies once and for all that the death benefit profiles of UK registered pension schemes and QROPS are identical for those returning to the UK. This will be great news for advisers as it massively increases retirement planning choices for those who are not tied to one particular product or jurisdiction."
Sanderson added: “More than ever, the decision will come down to where the member intends to retire and the application of income tax and double taxation treaties in those countries.”
In further reaction, Vince Smith-Hughes, Prudential head of business development, said: “While we are yet to see the detail, which should appear in the draft legislation, abolishing the 55% tax on death should encourage more people to save into a pension as it improves their financial planning options. It is also entirely consistent with the new pension rules that will come into effect in April next year.
“We believe these changes will make it even more important for many people to seek professional advice on their retirement income options – our research conducted after the Budget in March showed that 16% of people planning to retire later in 2014 were not aware of the planned changes to pensions that had been announced.”
Today’s announcement follows the radical pensions shake-up in Osborne's spring Budget when the Governement freed up people's ability to access their pension pots, and a raft of plans by providers for alternatives to the traditional annuity followed.
