The proposal to include unused pensions in scope for inheritance tax (IHT) is an unpopular one in the pensions industry.
The technical consultation on the rules closed in January this year, with an unprecedented 500 respondents. There are multiple challenges presented by the proposals, including unreasonable timescales and Government expectations, discretionary death benefits and non-standard assets.
One of the primary concerns that we raised in our consultation response was around the potential vulnerability of personal representatives. The Consumer Duty regulations define vulnerability as “someone who, due to their personal circumstances, is especially susceptible to harm”. The FCA goes on to include “life events” as a key driver of vulnerability, including those that have suffered a bereavement.
The draft legislation issued in late July provides that personal representatives will be responsible for acquiring the required information from pension scheme administrators and passing this to HMRC, as well as preparing for funding any tax liability that arises.
They will have to navigate these complex rules in a potentially bereaved state, within a very short timescale
It’s common for personal representatives to be a recently bereaved family member or a close friend of the deceased member. For those personal representatives who may not have ready access to financial or legal advice, they will have to navigate these complex rules in a potentially bereaved state, within a very short timescale.
This is a catastrophic own goal from the Government, who should be considering the emotional and financial stability of those who have lost someone close to them.
The Government are assuming that people have at least a base understanding and awareness of their pensions, to collate the required information before they pass away, making it easier for personal representatives to provide it within a four-week timescale. It’s clear that there is a lack of engagement with pensions in the UK, not aided by repeated delays in producing the pensions dashboards that will, in theory, provide a snapshot of most personal pensions in one place.
The technical consultation issued to garner industry views of the proposals implied that the pension scheme administrator would be responsible for collating relevant information from the personal representative. However, it was clear that this wouldn’t work in practice.
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Thankfully, the draft legislation provides that the personal representative is responsible for this. However, if they are vulnerable due to their relationship with the deceased member, can they be expected to make appropriate decisions or arrangements?
More consideration should have been given when drafting the legislation that the timescales imposed may create new vulnerabilities or exacerbate existing ones.
There is also a consideration from a pension scam perspective. Much like what followed the introduction of pension freedoms, large pension rule changes often seem to open a door to fraudsters, especially when there is a vulnerable person involved. People may be worried or feel pressured into making poor or rash decisions.
It isn’t just a case of people preparing better for their death. Many people do not have sufficient understanding of financial rules or pension legislation to know what they have, how to access it and what happens to those assets when they pass. For some, they will not have the financial stability or understanding to obtain financial advice, which would ease the process.
Many people do not have sufficient understanding of financial rules or pension legislation to know what they have
Vulnerability is not always permanent, but this doesn’t mean that they should not be a key part of the Government’s decision making on legislative changes.
The FCA’s Consumer Duty regulations expressly state that firms should “consider the potential positive and negative impacts of a product or service on vulnerable consumers. Design products and services to avoid potential harmful impacts”. This has clearly not been taken into account when creating the draft regulations regarding IHT on unused pensions.
Fundamentally, the draft regulations issued in late July in relation to IHT and pensions stand directly opposed to the Consumer Duty regulations – they actively increase the risk of poor outcomes and beneficiary detriment.
Caitlin Southall is director of SSAS transformation and proposition at WBR Group
