Plans to charge inheritance tax on unused retirement pots risk turning pension schemes into tax administrators and creating unnecessary distress for bereaved families, according to the Pensions and Lifetime Savings Association.
The trade body warned that, despite positive engagement between HM Revenue & Customs (HMRC) and the pensions sector, there were still significant “unintended consequences” of the plans.
In the Budget statement in October, chancellor Rachel Reeves announced that unused pension pots would be brought into scope of inheritance tax – a move she has argued is closing a “loophole” in the current system.
However, industry experts have warned that enacting the change will be highly complex and may have negative effects on bereaved families and pension schemes.
The PLSA stated: “Pension providers face significant administrative challenges if required to act as tax collectors, a role traditionally handled by personal legal representatives for inheritance tax matters.”
Joe Dabrowski, deputy director for policy at the PLSA, said: “A pension is not an estate planning vehicle and, under these proposals, would continue to be the most tax efficient way for the public to save for their retirement.
“However, we are concerned about the plan to make schemes act as tax administrators, a significant shift in responsibilities that could create unnecessary complexity and additional costs, putting schemes in a position they will struggle to manage while managing multiple regulatory pressures. This runs counter to the government’s growth objectives.”
The consultation on the proposed changes closed this week, with the Society of Pension Professionals labelling the plans “very problematic”.
Plans could cause ‘hardship and distress’
“Unduly subjecting death-in-service benefits to inheritance tax will cause delays in payment at times of hardship and distress for families.”
Pensions and Lifetime Savings Association
HMRC needed to clarify key details about the treatment of death-in-service benefits and some annuities, the association said.
“The timely payment of death-in-service benefits, which serve as life insurance for employees who have died young or in a work accident, is crucial for bereaved families, especially in the event of unforeseen deaths,” the PLSA said.
“Unduly subjecting these benefits to inheritance tax will cause delays in payment at times of hardship and distress for families.”
The PLSA is lobbying for the government to remove the requirement on pension funds to pay the tax, instead putting the responsibility on a person’s estate, as executors will have full view of an individual’s finances. It proposed a 12-month window to pay inheritance taxes before interest is charged.
However, it said pension schemes could still provide “guidance and calculations” to help ensure accurate and timely calculations.
“The PLSA will continue to collaborate with HMRC and industry stakeholders to refine these proposals, ensuring they meet their objectives without imposing undue burdens on families and schemes,” Dabrowski said.
Meanwhile, the chief executives of four investment platform providers have written a joint letter to Rachel Reeves warning of the complexity that the tax proposals threaten to introduce.
The bosses of AJ Bell, Interactive Investor, Hargreaves Lansdown and Quilter cited Ministry of Justice data that showed the number of probate cases taking more than a year to complete had risen by 134% in the past three years.
The approach would “lead to substantial delays paying money to beneficiaries on death and cause distress for bereaved families”, they added.
