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Chancellor George Osborne: "This is for everyone who works hard and saves hard for their retirement"
Pensioners will be able to leave more of their money to the next generation from next April, George Osborne is to announce at the Tory conference.
The chancellor will abolish a 55% tax that currently applies to untouched "defined contribution" pension pots left by those aged 75 or over, and to pensions from which money has already been withdrawn.
Inheritors will now only pay the marginal income tax rate, or no tax at all if the deceased was under 75 and the pension is left untouched.
The Treasury predicts the new policy will cost approximately £150m per year.
The idea was first floated in July, when a consultation was launched.
As well as the pension change, Mr Osborne is also expected to announce a "big cut" to welfare spending, BBC political editor Nick Robinson said.
Labour and the Liberal Democrats will be challenged to match the measure, he added.
European referendumMr Osborne is attempting to shift the focus on to policy after a day dominated by the fallout from MP Mark Reckless's defection to UKIP.
Senior Conservative MPs and cabinet ministers lined up to criticise Mr Reckless, with party chairman Grant Shapps accusing him of "betrayal" and Commons leader William Hague saying his decision was "hypocritical".
Mr Reckless has said he no longer trusts David Cameron to deliver on immigration, cutting taxes and Europe - and like previous defector Douglas Carswell - he will seek to return to the Commons as a UKIP MP in a by-election.
Speaking on BBC Radio 4's Today programme, Mr Osborne said the way to resolve the debate over Europe was to hold a referendum on the UK's membership - as promised by the Conservatives.
He said there was a "wide range of opinions" and some "very strong views" in the business community about Europe.
"If we did not think it was in Britain's interests to be in the European Union, we would not argue for it," he said.
Mr Osborne compared the pledge of a referendum with the recent vote on Scottish independence, saying "the march of the separatists" was "reversed" by the 'No' vote.
And on the economy, he said it was a "dangerous myth" that the link between economic prosperity and people's personal finances had been broken.
The Conservatives want to use their final conference before a general election to unveil policies - on housing, apprenticeships and pensions - that demonstrate they are on the side of hard-pressed voters and not just focused on cutting the deficit.
'Hard-earned pensions'In a move expected to go down well with core Conservative voters, Mr Osborne is setting out plans to abolish the 55% tax charged when people pass on a pension pot. The government estimates that the changes are likely to affect 320,000 people.
Mr Osborne will say: "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.
"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."
Analysis: Joe Lynam, Business CorrespondentThis is the final part of the chancellor's radical pension reform programme.
In last March's Budget he said those saving for a pension would no longer be forced to buy an annuity - freeing up older people to spend their savings how and when they wanted.
This latest announcement will appeal to a wide spectrum of savers and voters and will remind us of how able the chancellor is at zeroing in on schemes which simultaneously appeal to core voters as well as Britain's legion of savers, who have been so stung by record low interest rates for over five years.
The government thinks 320,000 people might benefit from these latest reforms each year which will cost it around £150m. We won't know until December's Autumn Statement how this will be paid for.
The scrapping of the 55% rate is the latest in a string of changes to pension regulations introduced by George Osborne.
In March's Budget, the chancellor announced that pensioners would have the freedom to cash in as much or as little of their pension pot as they wanted, removing the need to buy an annuity.
The latest measure will apply to all inherited pensions received from April 2015.
The beneficiaries of anyone who dies before that date may also benefit from the tax cut, if payment is delayed until after the new policy comes into effect.
It says 12 million Britons have some form of defined contributions pensions saving.
Spouses and financially dependent children under the age of 23 are already exempt from the 55% tax, but the new policy introduces the following changes:
- When the deceased is 75 or over, beneficiaries will only have to pay their marginal income tax rate, and only when they take money out of the pension. There will be no restrictions on how much of the fund can be withdrawn at any one time.
- Tax-free access to the pension pot of those who die under 75, to any beneficiary, including if the pension is already in "drawdown", meaning income has been drawn from the fund while it is still being invested.
Mr Osborne will also attack the credibility of Labour's economic policies, saying: "The idea that you can raise living standards, or fund the brilliant NHS we want, or provide for our national security without a plan to fix the economy is nonsense.
"It's the economy that builds houses. It's the economy that creates jobs.
"It's the economy that pays for hospitals. It's the economy that puts food on the table.
"That's why it's the economy that settles elections. And the Conservatives are the only people in British politics with a plan to fix the economy."
What is your reaction to George Osborne's proposals? You can email your comments to haveyoursay@bbc.co.uk
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