Don’t make pension schemes tax administrators’ says plsa as it highlights unintended consequences and implementation issues with inheritance tax proposals for pensions

The key concerns include both potential unintended consequences for bereaved families, and a severe operational impact on pension schemes.

The proposals, set to take effect in April 2027, aim to tighten the current IHT rules regarding pension lump sum death benefits. While the 30-month lead time, and HMRC’s engagement with industry has been a positive step, questions remain about how the changes will work in practice and the extent of their impact.

The proposed changes include:

• Applying inheritance tax to lump sum death benefits under certain circumstances, such as death-in-service payments, at up to 40%.
• Mandating that pension schemes act as tax administrators, calculating and deducting IHT on payments made to beneficiaries.
• Requiring the payment of tax and reporting within six months of a scheme member’s death.

While the PLSA supports HMRC’s intention to address inconsistencies in the proposed system, it has identified the following concerns:

• Clarity required: Key details about how death-in-service lump sums, and certain specific annuities purchased with defined contribution pensions will be treated, need clarifying. 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. Unduly subjecting these benefits to IHT will cause delays in payment at times of hardship and distress for families.
• Unfair tax treatment: Unmarried partners risk potentially discriminatory treatment – there are marital status disparities, as unwed partners with children may lose up to 40% of these benefits compared to those who have a UK recognised marriage.
• Challenges for pension schemes: Pension providers face significant administrative challenges if required to act as tax collectors, a role traditionally handled by personal legal representatives for IHT matters.

The PLSA proposes an alternative approach. The estate should be responsible for paying inheritance tax, with twelve months from the date of death to settle before interest accrues, removing the pension scheme as an intermediary. Pension schemes can assist by providing guidance and calculations on inheritance tax, ensuring accuracy and preventing delays. To improve the process, it should be redesigned with the Pension Industry Stakeholder Forum, placing responsibility for calculation, reporting, and payment squarely with the estate, which has full visibility of the deceased's finances.

These proposals remain aligned with the overall policy objective of bringing pensions into scope for inheritance tax purposes. However, it would simplify the way in which inheritance tax on pensions can be paid. 

Read the full proposals and response here.

Joe Dabrowski, Deputy Director or Policy at the Pensions and Lifetime Savings Association, said; “We agree with the Government’s overall ambition to bring pensions into scope for inheritance tax and welcome the 30-month lead time for implementation. 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.

“To make these changes fair and practical, we urge HMRC to clarify how death-in-service payments and certain annuities will be treated, and shift tax calculation and reporting duties back to legal personal representatives, as they will have full view of the estate’s finances.

“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.”

ENDS

Mark Smith, Head of Media Relations
020 7601 1726 | [email protected]

Cali Sullivan, Senior PR Manager
020 7601 1761 | [email protected]