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Pensions consultants and wealth management bosses have urged the Treasury to rethink plans for how inheritance tax will be applied to pension funds, warning that current proposals could lead to severe delays and increased costs for the bereaved, even in cases where inheritance tax is not due.
In her budget last fall, Chancellor Rachel Reeves He announced that pension funds would become part of inherited estates by April 2027, a move that will upset tax planning by the wealthy but will raise £1.5bn a year for the Treasury by 2030.
The government estimates that its proposals will bring around 1.5 per cent of extra estates into the death charge band in 2027-28, on top of the 4 per cent already above the £325,000 zero rate band, which could rise to £500,000 as Property is transferred.
But concerns have been raised by tax and pensions specialists about potential adverse effects in consultations on technical details of the government's proposals which end on Wednesday.
The Society of Pensions Professionals, a trade association, warned that the government's plans “impose unrealistic and impractical timelines” while applying interest charges or penalties to pension system administrators for delays “over which they have little or no control.” “.
The chief executives of some of the UK's largest wealth management firms, including Interactive Investor, Quilter and AJ Bell, have also written to the finance minister about the “flawed and potentially harmful” proposals, calling on the government to “work with the pensions industry to agree these proposals”. A simpler way to achieve the policy goal.”
The letter, seen by the Financial Times, said: “The complexity of the proposed approach, namely bringing all pensions into estates for the benefit of IHT, will result in significant delays in the payment of funds to beneficiaries on death and cause distress to bereaved families.”
Under the proposals, personal representatives of inherited superannuation funds would be responsible for identifying funds and calculating the amount owed if there is any IHT, taking into account other assets in the estate. The superannuation scheme administrator will then be responsible for paying inheritance tax before the funds are released.
Experts say this could cause delays in payments, including for those who are not responsible for paying the tax. Under current rules, inherited pensions can be paid more quickly to beneficiaries and used to pay probate costs, funeral fees and other urgent bills.
“The (new) process is complicated and will penalize low-income people,” said Anna Rogers, senior partner at Arc Pension Law. “Wealthy people don't need money quickly… It seems the damage will be disproportionate to those who are not wealthy and those who die young.
Lawyers are also concerned that the six-month period between death and the deadline to pay inheritance tax does not leave enough time to determine superannuation funds and calculate the tax, leaving individuals vulnerable to late payment charges.
“Superannuation rules allow a death benefit to be paid for two years… There may be a need to sell assets to pay the tax, but there may be cases where people are unable to pay, for example if there are Need to sell property.
The SPP has urged the government to either leave the calculation and payment of IHT to the pensions' personal representative and HMRC – or to tax the entire benefit at 40 per cent and pay it immediately by the scheme administrator in the minority of cases where a pension is subject to IHT.
Steve Hitchiner, chairman of the SPP, said issues around reporting and paying inheritance tax on pensions were “vitally important” and the current proposals “would create many problems and challenges that are largely avoidable”.
Some death in service benefits, designed to provide financial security for someone's dependents if they die unexpectedly young, can also face a large inheritance tax bill, in cases where they are set up as part of a registered pension scheme.
“It's probably going to be a mess. . . . At some point there's going to be a backlash,” Harris said.
Kate Smith, head of public affairs at Aegon, added that there was a lack of clarity about what was in scope and that “no one believes (the proposals) will work”.
“We continue to incentivize pension savings for their intended purpose of funding retirement rather than using them publicly as a means of transferring wealth,” the Treasury said.
