The savings organisation has suggested alternatives, which it said would be simpler and would reduce the burden of dealing with complex rules after the death of a family member.
From April 2027, pensions will be subject to the 40% rate on estates worth up to £325,000 after the change was announced in the Autumn Budget last year.
A report entitled Alternative Approaches to Taxing Unused Pension Wealth, produced by Oxford Economics, outlines two models that TISA said meet the Government’s revenue and policy objectives while avoiding the risk of delays, confusion, and added pressure on bereaved families.
Both approaches would remove unused pensions from inheritance tax estate calculations entirely. Beneficiaries would either be taxed directly at their marginal rate, or alternatively, a standalone flat-rate “inheritable pension tax charge” would be due on benefits above a nil-rate threshold.
TISA said the suggestions would “provide certainty for consumers”, helping them save with confidence and with full awareness of their tax position on death.
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TISA said it is appropriate for pensions to remain outside the inheritance tax regime and instead have their own tax system, as pension funds are partly funded through tax relief that is not available to other savings products.
Proposal ‘risks creating unnecessary stress and delays for grieving families’
Renny Biggins, head of retirement at TISA, said: “The Government’s proposal to include unused pension funds within IHT risks creating unnecessary stress and delays for grieving families and causing long-term behavioural change among consumers that we don’t yet fully understand, particularly around pension contribution levels and withdrawals.
“Instead, our research offers alternative approaches to consider, which would protect vulnerable people, support grieving families, and preserve confidence in pension saving. We show that you can still meet the Government’s fiscal and policy goals without creating additional issues and concerns for people at the worst possible time.”
TISA warned that the Government’s proposal could lead consumers to reduce contributions, draw down savings early, or move assets out of pensions altogether, weakening consumer retirement outcomes and undermining pensions adequacy. It claimed its proposals are designed to avoid these “unintended behavioural consequences”.
Andrew Tully, technical director at Nucleus, said: “Including pensions within the IHT environment will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry, and HMRC. This complex process will cause bereaved families confusion and stress at a difficult time and doesn’t fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one.
“Most importantly, it will significantly slow down the payment of death benefits and mean many beneficiaries will lose out financially after IHT late payment interest penalties are levied. This research demonstrates there are other options, which allow the Government to increase its tax take on wealthier people passing on pension wealth, while avoiding the numerous problems created by bringing pensions into IHT. I hope the Government seriously consider alternatives rather than simply pushing ahead with the proposed complex and punitive rules.”
