Chancellor George Osborne is scrapping the 55 per cent rate on pension pots – otherwise known as the death tax – meaning pensioners can leave more of their money to their children.

UK finance minister George Osborne is scrapping the 55 per cent rate on pension pots on transfer to the next generation – otherwise known as the death tax – meaning pensioners can leave more of their money to their children.

The announcement at the Conservative Party conference yesterday is a move designed to appeal to traditional older voters, such as those who may have considered voting for the United Kingdom Independence Party, seen as a threat due to its centre-right stance on issues such as immigration.

The pension tax plan will come into play in April next year.

Currently, if people die without exhausting their pension funds, their inheritance to any children or grandchildren over the age of 23 is taxed at a hefty 55 per cent.

From April 2015, anyone who inherits a pension fund will have no tax to pay - whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25 million ($2.0 million) on the amount of money anyone can put into a pension in total.

The measures also have particular relevance for the wealthy, who are likely to now view their pensions funds as a tax-efficient savings vehicle, as passing on a pension will carry no tax liability. This is unlike other assets – such as money in shares or savings accounts – that are liable for inheritance tax (IHT).

"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," Osborne told the conference.

"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," he added.

The reaction from wealth and money managers to the measure has been positive, while Jonathan Cridland director general at CBI said it would encourage people to save more.

"This is a welcome change which will encourage people to save more, and with greater flexibility, for their retirement. There is a real issue in the UK with people not saving enough for retirement, especially as we are now enjoying longer lives. The government should also commit to keeping the higher rate of tax relief on pensions, as we try to rebuild our savings culture," he said.