The government’s plan to bring pensions within the scope of inheritance tax (IHT) risks causing unnecessary delays and distress for bereaved families, according to consultancy group LCP.
The firm issued its warning on Monday (3 November) ahead of a session of the House of Lords Economic Affairs Committee, where LCP partner Steve Webb gave oral evidence alongside fellow former pensions minister Baroness Ros Altmann and Renny Biggins, head of retirement at The Investment and Saving Alliance (TISA).
The committee is conducting an inquiry into the draft Finance Bill, including the proposed changes to the IHT treatment of unused pension funds, which were announced by chancellor Rachel Reeves in the 2024 Budget last October.
In a joint submission to the committee, Webb and Alasdair Mayes, LCP’s head of pensions tax, said the reforms need major revision if they are to be implemented fairly and effectively. They warned that, as currently drafted, the rules go far beyond their intended purpose of stopping defined contribution pension pots from being used to avoid IHT.
LCP highlighted that the new regime would also capture “death in deferment” lump sums from defined benefit schemes and even small funeral grants – neither of which are used for tax avoidance. The firm called for these benefits to be excluded.
It also warned that personal representatives could be held responsible for paying IHT on money they cannot access, such as pension pots paid directly to other beneficiaries.
Webb said: “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. This deadline needs to be extended, otherwise people will be punished for something which may well not be their fault.”
LCP further proposed faster data-sharing between registrars, HM Revenue & Customs (HMRC), and pension schemes, and allowing payouts to exempt beneficiaries such as widows and widowers before IHT matters are finalised.
TISA has previously called for a simplified approach to applying IHT to pensions using flat rates and minimum thresholds. At the time, TISA’s Biggins said: “The government’s proposal risks creating unnecessary stress and delays for grieving families and causing long-term behavioural change among consumers.”
In July, HMRC published more details on how it intends to manage the change, including removing a requirement for pension scheme administrators to be responsible for levying the tax.
The committee’s findings are expected to inform recommendations on the Finance Bill.
