New research published today by The Investing and Saving Alliance (TISA) proposes alternative approaches to the Government’s proposed inheritance tax (IHT) reforms to pensions, which are due to be introduced from April 2027. The alternative approaches aim to reduce the burden of dealing with complex rules and ensure grieving families avoid unnecessary delays while still achieving comparable fiscal outcomes for the Government.
This will provide certainty for consumers, helping them save with confidence and with full awareness of their tax position on death. It is appropriate for pensions to remain outside the IHT regime and instead have their own tax system, as pension funds are partly funded through tax relief that is not available to other savings products.
Alternative Approaches to Taxing Unused Pension Wealth, produced by Oxford Economics, 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 occur under current proposals.
Both approaches would remove unused pensions from IHT estate calculations entirely. Beneficiaries would either be taxed directly at their marginal rate, or alternatively, a standalone flat rate “inheritable pension tax charge” would be due on benefits above a nil rate threshold.
Renny Biggins, Head of Retirement, TISA said:
“The Government’s proposal to include unused pension funds within IHT risks creating unnecessary stress and delays for grieving families and causing long-term behavioural change among consumers that we don’t yet fully understand, particularly around pension contribution levels and withdrawals.
Instead, 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.”
The Government’s proposal could lead consumers to reduce contributions, draw down savings early, or move assets out of pensions altogether, weakening consumer retirement outcomes and undermining pensions adequacy.
TISA’s proposals are designed to avoid these unintended behavioural consequences. Further consideration is also needed regarding the interaction between annuity death benefits and any future regime.
The alternative approaches would integrate with existing HMRC processes and avoid increasing pressure on personal representatives, who are often family members dealing with complex legal and financial responsibilities during bereavement.
Andrew Tully, Technical Director, Nucleus said: “Including pensions within the IHT environment will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry, and HMRC. This complex process will cause bereaved families confusion and stress at a difficult time and doesn’t fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one. Most importantly it will significantly slow down the payment of death benefits and mean many beneficiaries will lose out financially after IHT late payment interest penalties are levied. This research demonstrates there are other options which allow the Government to increase its tax take on wealthier people passing on pension wealth, while avoiding the numerous problems created by bringing pensions into IHT. I hope the Government seriously consider alternatives rather than simply pushing ahead with the proposed complex and punitive rules.”
Jon Greer, Head of Retirement Policy, Quilter said: “The proposals offer pragmatic and proportionate alternatives to the government’s current IHT plans for unused pensions. They would reduce the delays and complexity that grieving families and personal representatives would otherwise face. 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.”
Tom Selby, Director of Public Policy, AJ Bell said: “While the decision to tax pensions on death is a matter for government, IHT is arguably the most complex, time-consuming way of achieving that policy goal. If the Treasury refuses to budge, it will be the bereaved families of people who have saved diligently all their lives who will be left to handle this administrative nightmare. Anyone who has had the misfortune of dealing with IHT knows that probate can already be a tortuous process without throwing the complexity of potentially multiple pensions into the mix. The alternatives set out in this paper would be infinitely simpler and achieve exactly the same annual cost saving to the Exchequer.”
Natasha Moss, Product Manager, Delta Financial Systems said: “Delta welcomes the opportunity to work with TISA and industry peers on finding a more workable solution to the proposed IHT changes. Our shared focus has been on achieving a fair outcome for members and beneficiaries, while also reducing the complexity and administrative burden for pension scheme providers. The alternatives put forward offer a simpler, more practical framework that supports better understanding for members and smoother delivery for administrators. We hope this encourages further engagement between government and the industry to find a fairer way forward.”
Pete Maddern, Managing Director, Retirement, Canada Life UK said:
“Bringing pensions into the scope of inheritance tax risks unintended consequences, potentially causing financial harm and additional hardship to bereaved families. It is particularly concerning that annuities and death in service benefits are also set be captured by the Government’s proposals, despite these products working in fundamentally different ways to pensions. Death in service benefits in particular provide a critical short-term financial lifeline for families coping with the loss of a working age earner, ensuring they can assess funds without delays or the need for probate. The proposals outlined in TISA’s paper are credible and proportionate alternatives to achieving the Government’s policy objectives and fiscal goals, while delivering a fairer and simpler solution for consumers.”
Anne Fairweather, Head of Government Affairs & Public Policy, Hargreaves Lansdown said: “The proposed changes have caused confusion for people’s retirement strategies and will bring extra complexity to families at an already difficult time having lost a loved one. This research shows that if the government would like to reform tax treatment of unused pensions on death, then there are better ways to go about it. This report sparks a much-needed debate. Exploring alternatives will mean we can reduce complexity and make sure that grieving families are not put under financial strain due to delays in receiving their money. We also need to explore how these pensions are taxed both pre and post crystallisation to ensure families are not unfairly penalised.”
Craig Rickman, Personal Finance Editor, interactive investor said: “The government is clearly steadfast in its intention to apply a tax on unspent pension savings, but the proposals in their current form are fraught with issues, risking lengthy probate delays and additional costs, which may cause unnecessary distress to grieving family members. We’re already seeing consumers alter their behaviour ahead of April 2027, in some cases making pension withdrawals sooner than previously intended in fear of loved ones facing exorbitant tax bills and an administrative nightmare. This could not only lead to poorer outcomes in retirement, but damage trust and confidence in the pension system. We believe the alternative solutions set out in the report are a fairer and more efficient way to tax pension savings on death, without detriment to the government’s fiscal targets.”
Renny Biggins added:
“The two alternatives we’ve set out offer a simple and proportionate approach, taxing beneficiaries on what they receive in a way that still discourages the use of pensions as a wealth transfer vehicle but does not pull unused pensions into the complex inheritance tax system. Our proposals would ease the burden on scheme members, beneficiaries and the industry, while also supporting the Government’s goal to reduce regulatory costs by 25% this Parliament.
We hope this report prompts further discussion between industry and government to revisit the current approach and deliver a fairer outcome for all.”
