The Chancellor will also be seeking to get the Conservative Party conference back on track after a weekend which saw Tory ranks rocked by another Ukip defection and a sex scandal.
The move, which Mr Osborne is expected to announce at the conference in Birmingham, will see the 55 per cent levy on pension pots passed to loved ones scrapped. The policy is expected to be in this year’s Autumn Statement and cost the Exchequer £150 million a year. It would come into effect in April 2015, just a few weeks before the election.
Mr Osborne’s speech today comes after the conference was overshadowed by the party’s latest defection to the UK Independence Party (Ukip). Rochester MP Mark Reckless followed Clacton MP Douglas Carswell in joining Ukip, meaning the Tories now face two potentially damaging by-elections.
Cabinet Office minister Brooks Newmark also resigned after reportedly sending explicit pictures of himself to an undercover tabloid reporter. Mr Newmark, the minister for civil society, allegedly exchanged X-rated pictures over the internet.
In a further blow for the party, polling carried out by Lord Ashcroft showed yesterday that the Conservatives are trailing Labour by 11 per cent in key marginals. The former Tory Treasurer said that the Conservatives can only afford to lose 22 seats but are behind in 24.
In a bid to put the Tories on the front foot, Mr Osborne will tell the party that the end of the levy will apply to all payments made from April 2015.
Mr Osborne is expected to 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.”
In an attack on Labour’s promises to boost NHS spending last week, he is also expected to say: “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.” He will add: “The Conservatives are the only people in British politics with a plan to fix the economy.”
Pensions expert Ros Altmann said the announcement was good news for savers.
She said: “Instead of having to pay a punitive 55 per cent tax charge, they will be able to pass on any money left in their pension funds tax free to their loved ones.
“Those who inherit pension funds can choose to keep it as a tax-free pension, or they can just pay income tax on it and spend the money, perhaps to help them on to the housing ladder or with education fees.
“Retirees will have a real incentive to keep money in their pension funds, now that the threat of a 55 per cent tax penalty is being removed.”
Meanwhile, former foreign secretary William Hague used his last conference speech as an MP yesterday to make a passionate appeal to eurosceptics in his party not to join Ukip, warning that defections will prevent a referendum on EU membership.
Several other Tory eurosceptic MPs are rumoured to be considering switching parties.
Mr Hague said: “Anyone who votes for Ukip is not voting for a referendum on Europe but is actually obstructing it, is helping a Labour leader who would ensure no referendum takes place at all.
“We will go on fighting to hold that referendum and win that fight while those who have joined Ukip sit on the sidelines and do precisely nothing to bring it about.
“Let us be very frank – let me say it like a Yorkshireman: it is not only self-defeating and counter-productive, it is also hypocritical and dishonest, to say you want to give people a choice on Europe and then help the election of a Labour government that would never give people that choice.”
Earlier, Prime Minister David Cameron acknowledged that Mr Reckless’ departure made a Conservative government “less likely” after 2015.
He added: “These things are frustrating and, frankly, they are counter-productive and rather senseless. If you want to have a European referendum, if you want to have immigration controlled, if you want to get the deficit down, if you want to build a stronger Britain that we can be proud of, there is only one option, and that is to have a Conservative government after the next election.”