HMRC had proposed that when the the scrapping of the pensions Lifetime Allowance is officially enshrined in law next April a new death tax would be applied on pots.

Traditionally, pension pots have been outside any inheritance or death tax rules.

In a policy paper published yesterday to coincide with the Autumn Statement, HMRC confirmed that income withdrawals taken by beneficiaries where the member has died before age 75 will not be taxed, reversing a previous proposal.

An Autumn Finance Bill is due to be published shortly and will provide full details of the change.

Platform and SIPP provider AJ Bell welcomed the move but said that with just 90 working days until the new rules apply, there is potential to create problems for consumers, causing confusion and pushing them to make rushed decisions.

Rachel Vahey, head of policy development at AJ Bell, said: “In a welcome move for pension savers, HMRC has U-turned on its previous plans to create a new pensions death tax for those taking income withdrawals.

“Under current rules, if you die before age 75 your beneficiaries can inherit your defined contribution (DC) pension completely tax-free if it is under your lifetime allowance. HMRC has announced that, contrary to previous plans, this situation will continue.

“This is good news for pension savers. Creating a new stealth tax would have been a massive shift in policy hitting hard the beneficiaries of pension savers who die early.”

Les Cameron, head of technical at M&G Wealth, said: “It’s pleasing to see that, despite indications to the contrary in the draft legislation that, following consultation, income benefits for beneficiaries who receive them from a member who dies under the age 75 will remain tax-free. Previously, payments made to a trust from drawdown funds of those who die under the age of 75 were not tested against the Lifetime Allowance.”

Jon Greer, head of retirement policy at Quilter, said: “Today’s Autumn Statement confirms a reprieve for the taxation of inherited pensions where a member died before the age of 75. HMRC had previously confirmed in the summer that individuals who died with uncrystallised funds before age 75 and used those to provide beneficiaries with pensions via drawdown or annuity would be taxable. Fortunately, the government has confirmed that such pensions will remain tax free from April 2024 - a continuation of their current treatment.

“This is good news. If the government had gone ahead with the change to the tax treatment there would have been an incentive to take remaining funds as lump sums which are tax free up to the available lump sum and death benefit allowance, which will stand at £1,073,100. This confirmation means that there will be a similar treatment following the abolition of the Lifetime Allowance, albeit the amounts that can be used to provide beneficiaries’ pensions tax free appear to be unrestricted in their tax-free status. We look forward to seeing the fine detail in the Finance Bill.”

Chris Hudson, managing director retail intermediary at Standard Life, said: “Pensions are treated very favourably from an inheritance perspective with no tax due if the pension holder dies before 75 or at the marginal rate of the beneficiaries after that age. Under the original proposals linked to the scrapping of the allowance, where someone dies before 75, nominated beneficiaries would either have to receive the pension as a lump sum outside of a pension wrapper or as an income, taxable at their marginal rate. This proposed change is no longer being taken forward means an extra layer of pensions complexity will not be added.

“The removal of the LTA by April next year still has a number of logistical challenges that need to be worked through and people with funds above the previous LTA or protected level will be seeking to engage with their advisers or sourcing one very soon to assess the potential impact of future changes.”