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Pensions advisers and asset managers have called on the Treasury to review plans on how to apply inheritance tax to pension funds, warning that the current proposals could lead to long delays and increased costs for bereaved people, even where no inheritance tax is paid. heritage.
In her Budget last autumn, Chancellor Rachel Reeves announced that pension funds would become part of legacy assets by April 2027, a move intended to disrupt the tax planning of wealthy people but will raise £1.5bn a year for the Exchequer by 2030.
The government estimates its proposals will bring around 1.5 per cent more estates into the death duty band in 2027-28, on top of the 4 per cent already above the £325,000 rate-free band, which can rise to £500,00 where ownership is transferred.
But tax and pensions experts have raised concerns about the potential damaging effects during a consultation on the technical details of the government’s proposals, which closes on Wednesday.
The Society of Professional Pensioners, a trade association, warned that the government’s plans “impose unrealistic and impractical timelines” while imposing interest or penalties on pension scheme managers for delays “over which they have little or no control”.
The chief executives of some of the UK’s biggest asset managers, including Interactive Investor, Quilter and AJ Bell, have also written to the chancellor about the “flawed and potentially damaging” proposals, urging the government to “work with the pensions industry to agree a simpler method of achieving the policy objective”.
The letter, seen by the Financial Times, said: “The complexity of the proposed approach, specifically shifting all pensions into assets for IHT, will lead to significant delays in payments to beneficiaries after death and cause distress for bereaved families.”
Under the proposals, personal representatives of inherited pension funds would be responsible for identifying the funds and calculating how much IHT is owed, taking into account other assets in the estate. The pension scheme administrator would then be responsible for paying inheritance tax before the funds are released.
Experts say this could cause delays in payments, including to non-taxpayers. Under current rules, inherited pensions can be paid out to beneficiaries more quickly and used to pay probate costs, funeral costs and other urgent bills.
“(The new) process is complicated and will penalize those who earn less,” said Anna Rogers, senior partner at Arc Pensions Law. “Rich people don’t need money quickly. . . it seems that 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 for paying inheritance tax does not leave enough time for pension funds to be identified and the tax calculated, leaving individuals vulnerable to late payment charges.
“Pension system rules allow two years for the payment of death benefits. . . it may be necessary to sell assets to pay the tax, but there may be cases where people are unable to pay, for example if a property needs to be sold,” said Jeremy Harris, partner at Fieldfisher.
The SPP has called on the government to either leave the calculation and payment of IHT to the pension’s personal representative and HM Revenue and Customs — or for the benefit to be taxed in full at a rate of 40 per cent and paid immediately by the scheme manager in the minority of cases where the pension is subject to IHT -in.
Steve Hitchiner, chairman of the SPP, said the issues relating to reporting and paying inheritance tax on pensions were “of vital importance” and that the current proposals would “result in a number of problems and challenges that could largely be avoided”. .
Some death in service benefits, designed to provide financial security to one’s dependents if they die suddenly young, could also face heavy inheritance tax, where they are set up as part of a registered pension scheme.
“It has the potential to be a real mess … there’s going to be a backlash at some point,” Harris said.
Kate Smith, head of public affairs at Aegon, added that there was a lack of clarity around what was in scope and that “nobody thinks [the proposals] will work”.
The Treasury said: “We continue to encourage retirement savings for their intended purpose of funding retirement rather than being used openly as a means of transferring wealth.”
