The introduction of inheritance tax on pensions will add complexity and delays to the process, warn industry commentators.
As the government’s consultation on taxing unused pension funds closes, concerns have been raised that the current proposals risk creating ‘significant problems’ for bereaved families.
Jon Greer, head of retirement policy at Quilter, explains: “Under the current proposals, grieving families could face lengthy delays as executors are required to navigate a complicated process of gathering valuations, submitting forms and paying inheritance tax on pensions alongside other assets in the estate.
“This not only increases the emotional and administrative burden on families but could also lead to practical challenges, such as delays in accessing funds needed for living costs or settling immediate financial obligations.
“The consultation has been an important opportunity to highlight the practical issues of including pensions in IHT and the focus must be on finding practical solutions that minimise disruption for families.”
Greer said an alternative approach would be to reintroduce a flat-rate tax on unused pension funds after a nil rate band, similar to the system that existed prior to 2015. Under this approach, any unused pension funds would be taxed at a clear, fixed rate once their total exceeded a nil rate band that applied across all the members’ schemes.
As well as simplifying the process for families by keeping pensions distinct from the rest of the estate, a flat-rate tax would also eliminate the risk of extreme rates of double taxation, ensure consistency for savers and speed up the distribution of pension funds, says Quilter.
Greer added: “By keeping the process within the existing pension tax framework, the need for lengthy estate valuations and interactions with HMRC that the IHT process would introduce would be avoided, speeding up payment and easing the burden on both families and tax authorities that the current proposed IHT process would otherwise introduce. Additionally, the flat rate could be adjusted to meet revenue targets, ensuring it is fiscally effective without being punitive.”
Alastair Black, head of savings policy at abrdn, agreed that the initial consultation has demonstrated how challenging the new proposals will be.
He said: “One of the most significant impacts will be delays to the bereaved receiving their inheritance. This unfortunately will apply to everyone, even if their estate is small. The consultation helpfully asks for ideas on how to help mitigate some of these issues. We hope that HMRC will take on board the suggestions from abrdn and many others and look at alternatives such as applying a different Death tax on Pensions, completely separate from IHT to avoid complications and delays.
“Further, this consultation has highlighted exactly how complex IHT is, so we hope the Government take the opportunity to rethink the IHT system. Simplifying some of its elements could give families and advisers much-needed clarity and reassurance.”
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