Alternative approaches to the Government’s proposal to bring pensions into the scope of inheritance tax could raise similar revenue while reducing the burden on grieving families, a new report has found.
Research from The Investing and Saving Alliance (TISA) outlines two models that meet the Government’s revenue and policy objectives, while avoiding the risk of delays, confusion and added pressure on bereaved families, which TISA warns will happen under current proposals.
Both approaches would remove unused pensions from IHT estate calculations entirely.
Under the first approach, beneficiaries would be taxed directly at their marginal rate, while the second approach would see a standalone flat rate “inheritable pension tax charge” introduced on benefits above a nil rate threshold.
The report, which has been sponsored by a number of financial firms including AJ Bell, Canada Life UK, Hargreaves Lansdown and Quilter, suggests that the alternative approaches will provide certainty for consumers, helping them save with confidence and with full awareness of their tax position on death.
It argues that it is appropriate for pensions to remain outside the IHT regime and instead have their own tax system because they are partly funded through tax relief that is not available to other savings products.
Renny Biggins, head of retirement at TISA, warned that the current proposals risk creating unnecessary stress and delays for grieving families:
“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.”
According to the report, the alternative approaches would integrate with existing HMRC processes and avoid increasing pressure on personal representatives, who are often family members.
TISA also stressed the risks around long-term behavioural change among consumers as a result of the proposals, particularly around pension contribution levels and withdrawals, which could weaken consumer retirement outcomes and undermine pensions adequacy.
Jon Greer, head of retirement policy at Quilter, commented: “The proposals offer pragmatic and proportionate alternatives to the Government’s current IHT plans for unused pensions. Crucially, these models deliver fiscal certainty without the administrative burden of IHT, supporting the policy intent to prevent pensions being used for wealth transfer and providing greater clarity for pension scheme members.
“It is critical that policymakers listen to the industry to ensure a more balanced approach that provides confidence for pension members and delivers better outcomes.”
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