Industry reacts to plans for IHT on pensions

07 February 2025

CEOs of four big players in the UK pension sector have urged the government to rethink its plans to introduce inheritance tax (IHT) on pension savings. They are concerned about the complexity of implementation but are not arguing with the underlying aim of the policy. 

The CEOs, including Steven Levin of Quilter and Michael Summersgill of AJ Bell, began a letter to Chancellor Rachel Reeves by saying: “We write to express our collective concern about the negative impact proposals to apply IHT to undrawn pensions will have on families and beneficiaries.

“The complexity of the proposed approach, namely bringing all pensions into estates for IHT, will lead to substantial delays paying money to beneficiaries on death and cause distress for bereaved families.”

Other points raised in the letter included concerns that the IHT process: “…has not been designed to reflect that pension funds are very different from other assets in the deceased’s estate.” 

The CEOs stressed that they are not arguing with the political decision to tax pensions on death. They are, however, urging the government to “reconsider these proposals and work with the pensions industry to agree a simpler method of achieving the policy aim.”

What is the government proposing? 

As we reported last year, in the Budget of 30 October 2024, Chancellor Rachel Reeves announced that pension savings will be considered part of someone’s estate and liable to IHT from April 2027. 

The IHT thresholds would stay the same, starting at £325,000 and increasing to £500,000 where a residence is part of the estate. Estates left entirely to spouses, civil partners or charities are not liable for IHT.

This move would mark a significant change in long established taxation rules. At the moment, pensions aren’t included when the value of someone’s estate is calculated for IHT purposes. 

A technical consultation has just completed in which the industry has an opportunity to express views on the process required to implement the changes. We await the government’s report on next steps for the IHT proposals.

Other responses to the pensions IHT proposals

The CEOs’ letter wasn’t the only example of industry warnings about the complexity of the proposals for inheritance tax on pensions. 

Steve Webb, former Pensions Minister, is concerned about the effect the new rules will have on the time families wait to gain control of an estate after a bereavement. 

Waiting periods of six months or more in the probate process have already doubled at least in the past two years. Steve Webb says that the new rules for IHT on pensions could create ‘a bureaucratic nightmare' for grieving families. That’s because they would have to get together all the relevant information from the deceased’s pension providers.

Mr Webb says: “This could mean far more people still trying to wrap up someone's financial affairs more than a year after their death.”

Meanwhile, another former Pensions Minister went a step further in her criticism of the proposals. Ros Altman called the plans a ‘disaster’.

Writing in Money Marketing, she said: “Removing the IHT exemption basically destroys the tax incentives that encouraged more money into pensions while working and more money to stay in pensions through retirement. It will also mean fewer people in their 60s investing for the longer term in assets that can boost British growth, such as infrastructure, real estate or small companies, which is supposedly a key Government aim.”

Also writing in Money Marketing, Andrew Tully of Nucleus Financial mentioned the extra work that will be required of pension scheme administrators, solicitors and personal representatives (e.g. executors of wills). He echoed Steve Webb’s concerns about the delay this would add to the probate process.

Mr Tully is also worried about the possible impact on levels of pension saving: “The inclusion of pensions within IHT may discourage people from saving towards pensions, as well as encouraging more people to withdraw more as they move through retirement.

“This could, for example, mean many will have less capital wealth to cope with the costs of long-term care and may need greater state support than would previously have been the case.”

Positive reaction to the concept of IHT on pensions

It should be stressed that the industry reaction hasn’t all been negative about the concept of taxing pension savings after death. As mentioned above, the four CEOs are not arguing against the need to revisit the way that pension savings or income are taxed when passed to a beneficiary.

Josh Croft of AJ Bell also sees merit in the underlying reasons behind the government’s plans. Writing in FT Adviser he says: “The idea of discouraging individuals to use pensions as wealth transfer vehicles is perfectly reasonable, as pensions are fundamentally intended to provide an income during retirement rather than serve as a mechanism to pass wealth intergenerationally.

“By aligning pension policies with their primary purpose, the government can ensure that tax advantages are focused on supporting retirees’ living costs and reducing reliance on public welfare systems, rather than facilitating the transfer of assets to beneficiaries untaxed.”

He is, however, of the opinion that the proposed approach to include pensions within the scope of IHT “is likely to create significant complications if implemented as planned” including “prolonged delays in distributing pension funds to beneficiaries”.

He suggests another way to move forward: revisiting the rules for income tax on inherited pensions. Currently taxation on pensions after death rules mean that if someone passes away and their pension income is inherited, it will be tax-free if death occurs before 75, and at the beneficiary’s marginal rate if after age 75.

Mr Croft says: “A simpler solution would be to apply income tax alone to all pension death benefits, regardless of the age at which the member passes away. 

“This approach would be fairer as the highest earning beneficiaries would bear the heaviest tax burden and also eliminate the complexities of IHT as processes already exist to deduct income tax from pensions.”

Sources:

CEOs’ letter to Rachel Reeves: HL, Quilter and AJ Bell CEOs urge Reeves to reconsider IHT on pensions. City Wire. Accessed 28 January 2025.

Steve Webb on probate delays: Inheritance tax on pensions could make probate delays WORSE, experts warn. This is Money. Accessed 28 January 2025.

RosAltmann called the plans a disaster: Ros Altmann: The disaster of removing IHT exemptions for unused pension funds. Money Marketing. Accessed 28 January 2025.

Andrew Tully on delays and effect in pension saving: Andrew Tully: The government needs to look at alternatives to IHT on pensions. Money Marketing. Accessed 28 January 2025.

Josh Croft on the merit behind the concept of taxing inherited pension income: Bringing pensions into scope of IHT adds unnecessary complexity. FT Adviser. Accessed 28 January 2025.