Pension inheritance tax to finally be axed

Press Association
Conservative Party Conference Held In Birmingham - Day 1
Conservative Party Conference Held In Birmingham - Day 1

Savers will be able to pass on money in their pension pot tax-free to their children and grandchildren after their death, after Chancellor George Osborne announced plans to abolish a punitive 55% penalty tax.

The measure, announced at the Conservative conference in Birmingham, will apply to anyone inheriting cash held in a pension fund from April 2015 and is expected to benefit the families of hundreds of thousands of people to the tune of a total £150 million each year.

If the person passing on the pension pot is 75 or over, beneficiaries will only have to pay their marginal tax rate when drawing down the income, as they would with any pension. If over 75 there will be no tax to pay at all.
Essential guide to inheritance tax

In his speech to the conference tomorrow, Mr Osborne is expected to say the change will deliver "freedom for people's pensions. A pension tax abolished. Passing on your pension tax free - Not a promise for the next Conservative government, but put in place by Conservatives in government now."

And he will add: "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."

At present, highly complex rules allow savers to pass on pensions without tax only to spouses or children aged under 23, or in cases where they are aged under 75 and have not yet touched their pension pot. Others are required to pay the 55% charge.

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Sting Says Kids Won't Inherit His $306 Million Fortune
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Keep funds in your pension for longer

Aides said that the change was the last step in the Chancellor's wholesale reform of pensions.

Pensions expert Ros Altmann said: "This will encourage more people to keep more money in their pension funds for longer. This should benefit them in later life, especially if they need to pay for care.

"It will deter people from spending their pension money straight away, since money withdrawn will be subject to income tax.

"These new measures are also another nail in the coffin for annuities. Any money that has been used to buy an annuity cannot normally be passed on to the next generation, unless there is a guarantee attached, whereas funds in drawdown can pass on free of tax in future."

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Concerns pensioners could blow savings

Concerns have been expressed that Mr Osborne's decision to end the requirement to buy an annuity on retirement might encourage pensioners to splurge their savings on luxury items, rather than husbanding funds carefully to see them all the way through old age.

But Ms Altmann said: "These tax changes will provide a significant incentive for people to keep their money in the pension fund, where it can earn tax-free returns, until they really need it. This will help them if they live longer than expected, but could also provide a source of funding for care needs in later life, should this be required."

Mr Osborne is also expected to turn his fire on Labour in his conference speech, telling activists: "The idea that you can raise living standards, or fund the brilliant NHS we want, or provide for our national security without a plan to fix the economy is nonsense.

"It's the economy that builds houses. It's the economy that creates jobs. It's the economy that pays for hospitals. It's the economy that puts food on the table. That's why it's the economy that settles elections.

"And the Conservatives are the only people in British politics with a plan to fix the economy."

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'Onlythe privileged benefit'

Chris Leslie MP, Labour's shadow chief secretary to the Treasury, said: "George Osborne claims he has fixed the economy, but he's only fixed it for a privileged few at the top.

"While millionaires have got a huge tax cut, working people are £1,600 a year worse off under the Tories. And pensioners are paying more in tax because of George Osborne's VAT rise and the so called 'granny tax' which abolished the age-related tax allowance for the over 65s.

"Labour's economic plan will tackle the cost-of-living crisis, get more homes built and balance the books in a fairer way."

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