Chancellor George Osborne has announced plans to abolish a punitive death tax as the Tory hierarchy sought to regain the initiative after a series of setbacks rocked the Conservative Party Conference.
Savers will be able to pass on money in their pension pot tax-free to their children and grandchildren after their death, following Mr Osborne’s decision to scrap the 55% penalty tax.
The measure, announced at the 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 under, 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.
In his speech to the conference later, 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.
Aides said that the change was the last step in the Chancellor’s wholesale reform of pensions.
The conference has been overshadowed by the defection of Rochester and Strood MP Mark Reckless to Ukip and the resignation of minister Brooks Newmark in an internet sex scandal.
London mayor Boris Johnson, who will address the conference tomorrow, issued an appeal to any further would-be Tory defectors urging them not to break ranks and join Nigel Farage’s “people’s army”.
Writing in his weekly column in The Daily Telegraph, Mr Johnson said Conservative MPs would be “utterly nuts” to desert the party for Ukip as they simply risked handing power to Labour at next general election.
The electoral challenge facing David Cameron was underlined by polling in marginal seats which suggested Labour’s Ed Miliband was on course to enter No 10 after May’s general election.
Labour has established a “convincing” 11-point lead over Conservatives in the key marginal seats Mr Miliband would need to win to secure victory in next year’s general election, the study indicated.
The ComRes survey of the 40 tightest Labour/Conservative battlegrounds for ITV News comes as a further blow for Prime Minister David Cameron, who is trying to use his party’s annual conference in Birmingham as a launchpad to secure an overall majority in 2015.
Pensions expert Ros Altmann said Mr Osborne’s announcement will encourage people to keep more money in their retirement pot for longer.
“This should benefit them in later life, especially if they need to pay for care,” she said.
“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.”
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.”
But shadow Treasury chief secretary Chris Leslie 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.”