Chancellor announces new pensions tax shake-up

Chancellor of the Exchequer George Osborne has announced a number of new tax and spending plans, most notably the abolition of the so-called ‘death tax’.

The change concerns people who have defined pension contributions, who at present will have 55 per cent of their pension taxed in the event of their death.

From April next year this will no longer be the case, with the defined contribution being passed on to an inheritor nominated by the pensioner tax free, provided they have not yet reached the age of 75 and the money is in a drawdown account or uncrystallised.

Should the pensioner be 75 or older when they die, the nominated beneficiary will have full and flexible access to the cash and pay tax on it at their marginal rate of income tax. There is no limit to how much they can draw out, with one option to take a full lump sum, with a tax charge of 45 per cent.

The legislation, to be formally confirmed in the autumn statement, will affect around 320,000 people who retire with defined contribution pensions each year.

Mr Osborne’s new legislation could significantly alter the tax arrangements of some individuals as they plan for retirement, as they may find this a better way of storing money than sinking it into assets that could be subject to inheritance tax.

Among the organisations welcoming the change was Standard Life, which had been calling for such tax relief.

Head of customer affairs Julie Hutchison said: “Today’s fantastic news means pensions are now truly effective for income and inheritance tax planning. It creates a genuine incentive to save, knowing your loved ones can benefit too, helping older family members support younger generations who find it harder to save.”

Mr Osborne also used his speech to emphasise that tax would in general be lower under a Conservative government in the next parliament, arguing that more cuts are the best way to get the deficit down.

He remarked: “The option of taxing your way out of a deficit no longer exists, if it ever did.”