Inheritance tax changes announced by Chancellor Rachel Reeves have been branded “inhumane” by pension experts, who warn bereaved families could be hit with financial penalties if they fail to act quickly after a death.
From April 2027, pensions will be brought under inheritance tax rules for the first time. It means grieving relatives may have just six months to pay any tax owed before facing interest charges and penalties.
Former pensions minister Steve Webb, now a partner at consultancy LCP, told the House of Lords Economic Affairs Committee yesterday that the reforms would pile extra pressure on both families and pension providers.
“This is already a difficult time for families, and they will now face a ticking clock of six months before interest and penalties could apply if IHT is not sorted out,” he said.
Under the current system, pension funds are excluded from inheritance tax calculations – they do not count towards a person’s estate value or the nil-rate threshold. But that exemption will end under the new rules set out by Ms Reeves in last year’s Autumn Budget.
Mr Webb, who served as pensions minister in the coalition government, appeared before the Lords committee hearing on the Finance Bill to advocate for substantial modifications to the proposed system.
Together with Alasdair Mayes, LCP’s head of pensions and tax, he submitted a joint statement urging the inquiry to implement reforms that would create a “more effective, efficient and frankly humane” process.
The consultancy argues that whilst the policy aims to prevent defined contribution pensions being exploited as tax avoidance vehicles, the current proposals extend far beyond addressing this specific issue.
The new regulations could create significant obstacles for estate administrators who will bear responsibility for inheritance tax payments without necessarily controlling all pension assets.
The Chancellor has confirmed changes to inheritance tax rules impacting pensions | GETTY
Mr Webb highlighted scenarios where pension funds might be designated for beneficiaries other than the estate’s personal representative, potentially exposing administrators to liability for funds beyond their reach.
Payment delays represent another major concern, with legitimate beneficiaries potentially waiting months for their inheritance whilst tax matters are resolved.
“Under the new rules, it’s not clear assets can be paid until the whole process has been completed and the personal representative knows the value of all pension and non-pension assets and how these are to be split between exempt and non-exempt beneficiaries,” Webb explained.
Even straightforward cases, such as payouts to surviving spouses where no inheritance tax applies, could face lengthy holdups under the proposed framework.
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The reforms have already prompted significant behavioural changes amongst savers, according to wealth management firm Saltus.
Their research from October found that approximately one-third of individuals are actively investigating methods to shield their pensions from inheritance tax, whilst 30 per cent are reassessing or modifying their retirement savings strategies before the changes come into force.
“The decision to bring pensions into scope from 2027 has really sharpened focus on long-term planning,” said Alex Pugh, a financial planner at Saltus.
Ms Pugh noted that numerous clients are seeking clarification about whether the tax regulations might be altered again in future fiscal announcements.
The widespread concern reflects the fundamental shift these changes represent for retirement planning, transforming pensions from tax-efficient inheritance vehicles into assets subject to the same death duties as other estate components.
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LCP has put forward a series of proposals to make the inheritance tax reforms fairer and easier to manage.
The consultancy says certain payments, such as death-in-deferment lump sums and funeral costs, should be excluded from inheritance tax calculations because they are not used to avoid tax.
It also argues that personal representatives should only be held liable for parts of the estate they directly control, or alternatively be given the power to ask pension providers to deduct the tax before releasing any funds.
To ease the pressure on grieving families, LCP suggests extending the six-month deadline for settling inheritance tax bills or waiving penalties in cases where delays are caused by factors beyond their control.
The firm further recommends streamlining the process by allowing the government’s Tell Us Once service to automatically inform pension providers when someone dies, and by letting probate applications run at the same time as inheritance tax assessments.
Finally, LCP proposes that the new pensions dashboard should display any remaining pension balances to help families locate all pension assets more easily.