Proposals to charge inheritance tax on unused pension funds are unworkable - Ros Altmann
The House of Lords Finance Sub-Committee heard warnings last week, from myself among others, that Government proposals to charge inheritance tax (IHT) on unused pension funds are unworkable and must be urgently re-thought.
They will damage the defined contribution pension system, reduce contributions, accelerate withdrawals and cause misery and chaos for bereaved families. These new rules do not just mean a 40 per cent tax on pension inheritances. They are a fundamental restructuring of how pension death benefits are administered and taxed, with lump sums and even funeral benefits facing a 40 per cent tax hit.
The Government expects unpaid Executors/Personal Representatives (PRs) to find all past pensions, identify all beneficiaries, work out and pay any IHT due within six months – this is impossible.
Even professionals such as lawyers, financial advisers or accountants will struggle to meet the six months deadline, but many PRs or Executors of someone’s will are just family members, with no experience in pensions or tax, doing this all unpaid.
Pension administrators are not normally notified of a member’s death immediately, it can take weeks, especially if there is no will. Then the pension scheme must verify the PRs identity and authority, make reasonable enquiries as to potential beneficiaries and gather all necessary evidence before determining which benefits are to be paid to each person.
The burden of this is being placed mostly on PRs, who will be liable to pay any inheritance tax due within six months, but will not have money from the pension funds to pay it from and will have to deal with all this at a time when they are grieving their lost loved one.
The Government proposes a four-step process for dealing with unused pension funds on death. Each of these steps will take time and may not be understood by those trying to administer their loved one’s estate, or waiting to inherit their pension.
Until Probate is granted and all necessary checks on beneficiaries are finished, the pension fund and other benefits cannot be paid out. The rules do not allow any property to be sold either. Yet the PR and beneficiaries are liable to pay IHT within six months, regardless. This leaves them at the mercy of pension providers and the Probate Office.
Many people have several pension pots, which the PR - and even the deceased - may not know about. To finalise an estate – even if no IHT is actually payable - and distribute assets to beneficiaries, the PR will need to be sure they have found all past pensions or that there are none. The long-awaited Pensions Dashboard will not be fully operational when these new IHT pension rules start in 2027, so there will be no ready mechanism for tracing past pensions. The dashboard will also not include records of post-retirement pensions.
All estates will potentially be affected by this policy, especially as workplace auto-enrolment has brought millions more people into pensions. Perhaps policymakers think that, because many estates do not pay IHT, this will not be a problem. But not having a tax liability to pay is not the same as ‘not being impacted’ because the PRs/Executors of every estate will still need to check whether there were any pensions and will be liable for such checks/tax payments if applicable.
There have not been enough warnings about this coming catastrophe. It’s not too late to avoid this disaster – I do hope the Government will listen to reason.
Baroness Ros Altmann is a pensions expert and independent peer.