Reeves announced in the Autumn Budget that, subject to consultation, pensions will be included when calculating IHT from 2027.
But in a letter to the Chancellor and the Treasury, experts at AJ Bell outlined “flaws” in the proposals and called for the Government to consider other options which it said would be “simpler and fairer”.
Michael Summersgill, AJ Bell CEO, said: “The proposals set out by government create huge complexity and will delay families from accessing money in a timely fashion following a bereavement. In some cases the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension can’t be sold quickly.
“Add to this the fact that the proposals could result in millions of people paying a minimum tax rate of 64% on inherited pensions, and there is a real risk that confidence in pensions will be seriously eroded.
“We’re urging the Chancellor to instead consider alternative proposals from the industry, which would be fairer and simpler, without undermining her plan to tax unused pensions on death.”
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Government proposals
The Government is currently consulting on proposals to introduce an IHT liability on unused pension assets on death from April 2027. The proposals mean any unspent pension assets on death would be treated as part of the individual’s estate and may be subject to IHT.
Once passed to the beneficiary, income withdrawn from the pension could then also be subject to income tax at their own marginal rate.
AJ Bell said that the double taxation proposed means that pension assets would be subject to a 64% effective tax rate on death where the pension pot exceeds the IHT nil-rate band and the beneficiary is a higher rate taxpayer. But in many cases it could be far higher.
The investment company also said that proposals under consultation are likely to cause significant delays distributing money to families on death and in some cases may prove unworkable.
This is because pension schemes would be required to engage with the personal representative (PR) of the deceased scheme member. PRs would need to identify all pensions that were held in the individual’s name and determine how much of their IHT nil-rate band should be apportioned to the scheme or schemes. AJ Bell said this would cause “inevitable delays”, particularly where no will exists, and in many cases PRs would not be able to complete the process within the required six-month window.
AJ Bell also said that liquidity would present a major challenge under the current proposals. Pension funds holding illiquid assets – something the Government and the FCA are specifically trying to encourage through the creation of Long Term Asset Funds (LTAFs) and wider policy initiatives – often struggle to sell these within a year, let alone six months.
Alternative proposals
AJ Bell is calling on the Chancellor to explore alternative measures put forward by the industry as part of the consultation process. The business has suggested two options, which it believes would be simpler and fairer.
The first is to use a system similar to the current treatment of ISAs on death – this would mean investments are treated equally as part of the estate.
The second is for income tax to be applied on withdrawals at the marginal rate of the beneficiary. AJ Bell said this would offer a fair system in which those inheriting pensions with the highest incomes pay more tax, while also offering simplicity given pension assets are already subject to income tax where the member dies after age 75.
The investment platform said both of these options represent “preferable alternatives” to the Government proposals.