The abolition of the pensions 'death tax' will further diminish the attraction of annuities, a pensions expert believes.

There will be no longer be a charge on pension funds for beneficiaries if the person who dies is 75 or under, George Osborne will officially announce later at the Conservative party conference. This will take effect from next April.

For those over 75 years old at the time of death, a marginal rate of tax will be paid. There had been speculation that the tax charge would reduce from 55% to 40%, rather than being scrapped.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "These changes to the tax rules will be a mixed blessing. They will encourage investors to take the maximum possible advantage of their pension contribution allowances, which is certainly a good thing.

"Investors can build up their pension fund, secure in the knowledge that they can not only draw on their savings without restriction from age 55 but in addition, any unused savings can be passed on to their inheritors tax free on death.

"It is therefore likely to significantly boost demand for income drawdown in retirement and to diminish the relative attraction of annuities."

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The axing of the need to buy an annuity arising from the Budget has led to work developing hybrid retirement income products, Mr McPhail said, including those which use complex investment guarantees and hedging strategies.
Mr McPhail said: "So far we have not seen anything which appears to deliver a better mix of guarantees and potential investment returns than simply splitting a retirement fund between an annuity for certainty and a drawdown for flexibility."
He said the move came sooner and went much further than anticipated, suggesting political motivations may be behind it ahead of the General Election.
He said: "It was expected that the tax charge would reduce from 55% to 40%; a complete elimination of the tax charge is therefore considerably more radical than was anticipated."
The abolition of the tax will also encourage investors to preserve their pension funds to meet the cost of care funding, Mr McPhail added.