New research claims that the government could achieve its inheritance tax goals on pensions without burdening grieving families or undermining retirement saving.
The Investing and Savings Alliance (TISA) has put forward alternative options for taxing large pension pots when they are passed on to beneficiaries.
Backed by new modelling from Oxford Economics, TISA has proposed two simpler alternatives to the government’s inheritance tax (IHT) reforms, each capable of raising comparable revenue without the added stress, delay or behavioural fallout the current plans will likely trigger.
Under plans due to take effect from April 2027, unspent pension pots and certain death benefits would be included in IHT calculations.
The government says this is to stop pensions being used as vehicles for wealth transfer, but TISA and other industry bodies – including Pensions UK and the Society of Pension Professionals – have argued that the move would lead consumers to reduce contributions, draw down savings early, or move assets out of pensions altogether, weakening consumer retirement outcomes and undermining pensions adequacy.
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“The government’s proposal risks creating unnecessary stress and delays for grieving families and causing long-term behavioural change among consumers,” said Renny Biggins, head of retirement at TISA.
There is already evidence of shifting consumer behaviour. Interactive Investor reports that some savers are drawing down pensions earlier than planned to avoid complications for loved ones. “This could not only lead to poorer outcomes in retirement, but damage trust and confidence in the pension system,” said Craig Rickman, personal finance editor at Interactive Investor.
To avoid these unintended consequences, TISA commissioned Oxford Economics to model two policy options that would keep pensions outside the IHT regime while still meeting fiscal targets.
The first applies income tax at the beneficiary’s marginal rate, but only on inherited pots above £90,000. The second introduces a flat “inheritable pension tax” above a nil-rate threshold, with three variants modelled at 25%, 30% and 35%.
Both proposals are designed to integrate with existing HMRC processes, easing pressure on personal representatives and avoiding delays to death benefit payments. Crucially, Oxford Economics found that either approach would deliver revenues close to the Treasury’s plan, with annual differences never exceeding £40m.
“This research demonstrates there are other options which allow the government to increase its tax take… while avoiding the numerous problems created by bringing pensions into IHT.”
Andrew Tully, Nucleus
“Including pensions within the IHT environment will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry, and HMRC,” said Andrew Tully, technical director at Nucleus. “This complex process will cause bereaved families confusion and stress at a difficult time… 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… 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.”
Tom Selby, director of public policy at AJ Bell, added: “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.”
TISA’s Biggins concluded: “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.”
