Experts previously expected Osborne to reduce the charge to 40%, the same level as inheritance tax. Instead, he announced that the tax is to be abolished completely.
Osborne said:
"From next April, we will trust people with control over their own pensions.
"In this Autumn Statement, I confirm that the 55% death tax that currently applies when you pass an unused pension pot on to your loved ones will be abolished.
"People will be able to pass on their pensions to their loved ones tax free."
The measure will apply to income drawdown pension funds and to value-protected annuities, and will apply to all payments made after April 6 2015.
He also announced that people who die before the age of 75 with a joint life or guaranteed term annuity will also be able to pass that on tax free.
Andrew Tully, Pensions Technical Director at MGM Advantage said:
"This change brings annuity death benefits into line with drawdown, where on death before age 75 benefits can be paid tax-free. For deaths after age 75, a dependant's pension or remaining guaranteed instalments will be taxed as income in the hands of the recipient (again in line with drawdown).
"Allowing annuity benefits to be paid to any dependant gives people greater flexibility to pass on their pension wealth, for example to grown-up children.
"But it is worth keeping in mind this change will only benefit the estate of those who die before age 75. If you are a healthy 65 year old, then you have a 90% chance of surviving your 75th birthday. If you have moderate health conditions, for example diabetes or high blood pressure, then you have an 80% chance of surviving your 75th birthday.
"This is a fair move for customers who value the security and guarantees that annuities deliver. It shows the Government recognises that annuities can still play an important part of a customer's retirement strategy after April. While people may well want to use the new flexibility offered, many will also want a level of certainty and security provided by an annuity to cover at least their basic income needs."
John Lawson, Head of Policy, Retirement Solutions, Aviva said:
“This is good news and puts annuity tax treatment on the same footing as drawdown. This is important because we were concerned people may have made the wrong choice because one option had a different tax treatment. It also means that spouses who inherit when they are younger, when their partner dies before age 75, could save thousands of pounds in tax.”
Next week, market leading rates will be published on the government's new 65 plus pensioner bonds, which will be available from January.
Mark Stopard, Head of Product Development at Partnership, said:
“The Autumn Statement is a bonanza for older people as the Chancellor levels the playing fields and provides confirmation around Pensioner Bonds. The move to change the tax rules around annuities means that people can choose a guaranteed income for life (i.e. an annuity) without their spouse being penalised should they outlive them. This is a welcome step forward and another reason that eligible customers will find enhanced annuities, which pay a 65 year-old an average annual income of around 6.5%, attractive.
“Finally, we welcome the new tax-free ISA inheritance decision and the upcoming confirmation around Pensioner Bonds. In the current low interest environment, the opportunity to leave your ISA savings to your spouse tax-free is excellent news as is the opportunity to gain market-leading rates on bonds specifically designed for the over-65s – many of whom have saved their whole lives.”
Otto Thoresen, Director General, Association of British Insurers, said:
"We had asked the Government to abolish the 55% pension tax when someone dies, and the tax on annuity payments made after a partner has died and so we welcome today's announcement. With the new pension freedoms coming in in April it is very important to engage people with saving and the decisions they will need to make at retirement. Today's tax changes will give people more options. To ensure pensions tax policy is not skewed against income, the tax treatment of pension payments to a beneficiary after a customer’s death should be the same, whether paid through an annuity or drawdown as income or as a lump sum. We now hope for more clarity about how the changes in next April will actually work in practice as the industry is working flat out to get ready in time."
Francois Barker, head of pensions at law firm Eversheds, says:
"Today’s autumn statement on the “death tax” rules for annuities, when combined with the changes announced by the Chancellor at the Conservative party conference, potentially create an “annuity arbitrage” for occupational pension plans.
"In effect, pensions paid to survivors of pension plan members who die under age 75 will be tax free if they are paid as part of an annuity or drawdown arrangement. However, they will be taxed at the recipient’s marginal rate if they are part of a scheme pension – where the pension plan pays pensions to member and their survivors direct from the plan’s assets.
"This looks like a big disconnect in the way survivors’ pensions are taxed, and we are not clear why it makes sense to distinguish between the way survivors’ annuities and drawdown arrangements are taxed on the one hand, and plan pensions for survivors on the other.
?“This development may make it harder for schemes not to offer annuity or drawdown options, and pension plan members may well want to transfer their benefits out at retirement to set their pension up elsewhere in the most tax efficient way. This is yet another change for pension plan trustees, sponsors and members to factor into their thinking when there is already so much other change going on.”
