Ahead of the major pension changes already announced for April 2015, the Chancellor, George Osborne, announced another shift in pension policy that could have a big impact on many savers and their financial planning requirements.

Speaking at the Conservative Party’s Annual Conference, Mr Osborne announced the abolition of a so-called ‘death tax’, which can see any pension remaining on death taxed at a rate of 55%, before it is passed on to a beneficiary. The change, as with the other changes to pensions already announced, will be introduced from April next year.

The 55% tax is already waived in many cases where pension savings are passed to a spouse or a financially dependent child under the age of 23. The government estimates that the new change announced by Mr Osborne will impact an extra 320,000 people outside of the above groups. The details of the changes revealed different permutations for beneficiaries depending on how old the pension holder is at the time of their death.

• If the deceased is 75 or over, beneficiaries will pay only their marginal rate of income tax, with no limit on how much of the pension fund can be accessed at any one time.
• If the deceased is under 75, access to the pension fund will be tax free, including situations where the pension has already entered drawdown.

The proposal only impacts defined contribution pensions, although there may be new options to consider for individuals in final salary schemes. Similarly, the vast majority of the 320,000 people per year the government estimates this change will benefit will be individuals already in retirement. For those who pass away having not yet started to access their pensions, passing on savings to a beneficiary is a simpler affair, as your pension is counted as being outside of your estate for tax purposes.

The change has been seen by many as a continuation of the changes announced by Mr Osborne during March’s Budget. During that announcement, the Chancellor effectively abolished the need for savers to rely on an annuity in retirement, a device which could also see a portion of pension savings effectively wasted, when it comes time to pass on your estate to your family. The new taxation system announced this week effectively aligns the taxing of pension savings on death with the new approach to pensions which is due to become active in April 2015.