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Pension death tax abolished in the latest major change in Osborne's Pension Reforms

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Today, George Osborne has announced that the 55% pension death tax will be abolished. The move, which was first reported overnight, is yet more great news for investors, following the news earlier this year that annuities were no longer compulsory.

There was expected to be an announcement about a reduction in the rate later this year, but Osborne has surprised people by announcing it during at the Conservative Party Conference.

George Osborne, in making the announcement, said, “People who have worked and saved all their lives will be able to pass on their hard earned pensions to their families tax-free effective from today. The children and grandchildren, and any others who benefit will get the same tax treatment on this income as any other, but only when they choose to draw it down. Freedom for people’s pensions.”

The change comes into effect immediately and while there are concerns that this will leave a £150m hole in the budget, news on how that will be plugged will be revealed by the end of the year.

It is thought the change could have a positive impact on how people spend their pension following fears that people would take lump sums as soon as possible. Now the fear of the government taking over half of the remaining funds have gone, there is no reason to draw a higher than necessary income.

The move also means that for wealthier individuals who don’t intend to draw an income from their pension, there is no deterrent to not touching their pension pot as all funds will be eligible to be available as part of the estate.

It’s far too early to say whether this will actually encourage people to keep their money in pensions, however, with concerns over the previous reforms encouraging people to spend, spend, spend, this could provide a reason why they should avoid taking a full lump sum.

For British Expats who were considering moving their funds to a QROPS, where the death penalty tax would have been removed, it may make the transfer slightly less attractive, although that shouldn’t necessarily be the case as these should be seen as side benefits of a QROPS, rather than a primary reason.

Of course, a QROPS still offers non-UK residents with significant benefits including reduced income tax, and provide greater flexibility on investments.

However, it also highlights that two of the traditional reasons advisers would “sell” a QROPS (no reason to purchase an annuity, avoiding 55% death penalty) have also been negated. For expats considering QROPS, the focus now must be on receiving genuine financial advice, rather than transactional sales tactics which have been all too familiar with some advisory firms.

For expats who have already invested their pensions into a QROPS as a way to avoid annuities and death penalties, it may be prudent to review the setup of the QROPS to ensure that the QROPS is still benefiting them.