George Osborne has confirmed that retirees will be able to pass on annuity income tax-free, if they die before age 75. Currently, where a joint annuity is held, the survivor's pension would be taxed at their marginal rate.
For those who die after their 75th birthday, the pension will remain taxable at the survivor's marginal rate of income tax.
The changes will only apply where no payments have been made to the beneficiary before 6 April 2015.
More to benefit from joint-life annuities
Going forward, annuity holders will also be able to take more steps to preserve their wealth for family members other than spouses or civil partners. From April, tax rules will be amended to allow people to set up joint-life annuities, which will maintain payments for any chosen beneficiary, after the original policyholder has died.
Andrew Tully, pensions technical director at MGM Advantage, said: "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."
Annuities and drawdown on equal footing
The news follows a previous announcement that death taxes of 55% on income drawdown plans would be scrapped.
Raj Moody, head of pensions at PwC said: "The abolition of death tax on joint-life annuities will boost the attractiveness of annuities and level the playing field with income drawdown."
But however welcome the changes might be, Tully pointed out that the vast majority of retirees would be unable to benefit.
Only the young to benefit
"It is worth keeping in mind this change will only benefit the estate of those who die before 75. If you are a healthy 65-year old, then you have a 90% chance of surviving your 75th birthday," he said. Even those with moderate health problems including high blood pressure or diabetes still have an 80% chance of reaching that milestone.
Moody also said that while the decision may put annuities on a more equal footing with income drawdown from a tax point of view, he doubted it would be enough to draw retirees back to the annuity market.
Following the 2014 Budget, in which Osborne announced that savers could use their pension money as wish, annuity sales have plummeted. ABI figures show sales of the income plans in the third quarter of 2014 were down by 56% on the same quarter last year.
Moody added: "On its own, it is unlikely to kick-start a full-scale return to the annuities market once the pension freedoms come into force next April."
More change in the pipeline
As April 2015 draws closer, Moody also warned that savers should expect more regulatory changes to pensions.
"The pension reforms from the Budget earlier this year were so transformational we haven't seen the end of further changes needed to work out loose ends. Today's announcement won't be the last on pensions before next April. And it's unlikely to be all settled by April anyway – we expect another couple of years at least of ironing out all the practical detail," he said.