Government Response to IHT on Pensions - A Disappointing Outcome

The Government has now published its response to the Technical Consultation on Inheritance Tax (IHT) on pensions: liability, reporting and payment. Disappointingly, it appears they are pressing ahead with most of the proposals - despite well-reasoned and practical alternatives put forward by many in the industry, including ourselves.

In our consultation response back in January, we outlined our concerns in detail. Like others, we put forward simple, effective alternatives that would have met HMRC's revenue goals without introducing IHT into pensions.

For example:

  • Apply income tax at the recipient's marginal rate on death benefits - a fair, efficient method that aligns with how pension income is taxed during life and could allow for the removal of the Lump Sum Death Benefit Allowance (LSDBA), thereby simplifying the system.
  • Reintroduce a flat-rate death tax, similar to the approach used prior to the introduction of pension freedoms in 2015 - a model that was well-understood and easier to administer.

Instead, what we're left with is a complex, delayed, and potentially distressing system that puts the entire burden of tax payment on personal representatives (PRs) - often grieving relatives with little financial experience.

This approach risks significant delays to the payment of death benefits, currently processed within days or weeks, but now likely to take months as PRs navigate a much more cumbersome process.

The expectation that PRs will coordinate IHT calculations on pension funds, alongside the rest of the estate, adds unnecessary pressure and potential for error, especially given the tight six-month deadline for IHT payment.

While this may simplify things for scheme administrators, it's being done at the expense of beneficiaries and families, who will bear the stress of both complexity and delay.

Frankly, this feels like a short-sighted decision. While we recognise the fiscal pressures facing the government, the blanket dismissal of fair, practical alternatives is both disappointing and surprising.

The industry had presented thoughtful solutions that would raise similar tax revenue, but in a way that respects the unique nature of pensions and the need for swift support for families at their most vulnerable time.

We will continue to advocate for a more sensible and humane approach to taxing pension death benefits.

The information above is based on our understanding of the legislation applicable to UK Registered Pension Schemes, and HM Revenue & Customs rules. It is provided as a summary only and should not be taken as advice - Morgan Lloyd SIPP Services Ltd and Morgan Lloyd Administration Ltd are not authorised to give financial advice and will not be responsible for any decision or action taken as a result of relying on this information. If you are a retail client you should seek financial advice from a financial adviser who is authorised by the Financial Conduct Authority and/or seek guidance from the Government’s Pension Wise service.