This month I would like to look at a very important issue that was triggered by some seemingly positive news released by the UK Chancellor of the Exchequer, George Osborne at the recent Conservative party conference. Now, with an election fast approaching it is no surprise that all of the political parties are doing their best to canvas voters, and one of the most popular tools in the box is to announce tax cuts. However, things are not always as they seem, and I want to use this particular announcement as a case study.

Under the current system, a 55 per cent tax charge on inherited pensions applies when an individual wants to pay their pension out to somebody else as a lump sum after they die, and where the pension money is:

• Already in a drawdown account – i.e. benefits are being taken from the fund, regardless of the individual’s age, or

• “uncrystallised” (i.e. hasn’t been touched) and the individual dies at or over the age of 75

The individual can also pass their pension to a dependent, who can then take benefits from the fund and will pay UK taxes on it at their marginal rate of tax.

Where the individual dies under the age of 75 and the pension has not been touched, it can be paid out as a lump sum completely tax free.

So it is quite a draconian system that caught a lot of people out, who would have previously avoided this tax, and it has generated a significant new income stream for the government.

It should be noted that all of these rules only apply to what are referred to as defined contribution schemes – that is to say pensions where to contribute into, the fund grows and the pension that you will receive is based on this value. It does not apply to defined benefit or final salary schemes such as government schemes and older company pensions.

Under the new system, anyone who dies below aged 75 will be able to give their remaining pension to anyone completely tax free, whether it is in a drawdown account or untouched as long as it is paid out in lump sums or is taken through a drawdown account.

Those aged 75 or over when they die will be able to pass their defined contribution pension to any beneficiary who will then be able to draw down on it at their marginal rate of income tax. This tax cut will apply to all payments made after April 2015.

This all sounds great – the tax is being waived, 55 per cent saving and pass my pension fund onto my dependents. However, then we see the following comments:

Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45 per cent if the deceased was over 75. The Government intends to also make lump-sum payments subject to tax at the marginal rate.

So, if the deceased was over the age of 75, regardless of what they had done with their pension, there will be a 45 per cent tax charge – so a 10 per cent saving, but still a significant amount of money to pay in tax. The second part means that any lump sums could still be taxed at up to 45 per cent dependent on the income position of the dependent. Again, not quite the savings that the headline might have initially implied.

So in summary, while the headlines may paint a very attractive picture, the reality is potentially not quite as beneficial, and there are a number of caveats that need to be met for anyone to benefit. As with all aspects of financial planning, please seek appropriate advice.

— The writer is regional director at Acuma Independent Financial Advice.