The Government has announced more detail about how it proposes that IHT on pension funds should be dealt with. I believe its proposals will be almost unworkable and will undermine the future of DC pensions.
Such retrospective taxation undermines accepted norms of pension policy, making people less likely to contribute in the first place.
A couple of significant aspects of the original announcement have been changed.
They no longer plan to impose IHT on most death benefits, which is at least some good news. It will not now be up to the scheme administrators to arrange IHT payments after being notified of amounts by the executors, which of course all pension funds were up in arms about.
The industry, understandably, wants to avoid the horrendous delays, complexity and possible liabilities that would have involved.
However, instead of pension providers – who of course have professional departments to deal with pension administration matters – the Government plans to put the burden on the deceased person’s personal representatives (PRs), who are dealing with the whole estate. The changes, due to start in 2027, sound like a recipe for disaster and chaos.
Most people will have an incentive to take as much money out of their pension fund at the earliest possible date
Including all the person’s pensions in the IHT regime places potentially new burdens on Executors or PRs to find all the pensions – but we know there are huge numbers of ‘lost pots’ that even the deceased person may not have known about. They will have to identify all unused pensions, report them on the IHT Return and arrange for the tax to be paid, before distribution.
And all this while many of them will be bereaved relatives who are still coming to terms with the loss of a loved one and have never had much to do with pensions before.
The Government also plans to impose IHT on all unused pensions, even before age 55. So most people will have an incentive to take as much money out of their pension fund at the earliest possible date – especially if they are earning under the 40% tax threshold.
They can take this money at 20% tax, rather than risking dying soon and losing 40% of it. It is true that a spouse or civil partner can inherit the pension tax-free, but what about those who are single? This does not seem to be properly thought through.
It is also not clear who will inherit the pension? What if the Expression of Wish Form attached to the pension, contradicts something said about the beneficiaries of the will? This is a recipe for delays, chaos and potentially damaging liabilities on executors.
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Beneficiaries may dispute who should inherit the pension, the executors may have to take legal advice, they will not know what to tell the pension provider and, meanwhile, interest will be running on IHT not paid within six months of death.
And what if a new pension comes to light after the estate has been distributed – perhaps an old entitlement that was not known about? Will the executors be blamed for not finding this and then be personally liable for the tax and interest?
Imposing IHT on pension funds is a disaster for the future of DC pensions. Such retrospective taxation, after so many people have already made careful plans for later life, undermines the principle of putting money aside for the long-term.
Indeed, there have already been significant withdrawals and the aim of encouraging more long-term investment by our pension funds, especially in less liquid assets, will be less likely to materialise.
People on average earnings are the most likely to strip their pension fund quickly, leaving nothing to live on apart from state benefits, if they survive to a ripe old age. These are the ones who need pensions most and the core group being targeted by auto-enrolment.
This policy is yet another example of how the Treasury seems determined to make pensions more and more complicated
This policy is yet another example of how the Treasury seems determined to make pensions more and more complicated. Time and again, new complexities are added.
Why on earth can’t the Government make things simple? I understand they wish to recoup some of the generous tax relief that has helped build up the pension fund but the pension should be dealt with separately, outside the estate.
For example, it would be much less damaging to pensions and much easier to manage, if there was a specific 20% charge on unused pension funds, which the pension provider could deduct directly and pay over to HMRC. No faffing about with IHT Forms.
Others have suggested a mandatory 10-year drawdown of the pension after death, although there may still be difficulties identifying who the beneficiaries are and who would be allowed to withdraw the money.
It’s not too late to avoid this disaster. I do hope the Government will listen to reason.
Ros Altmann was pensions minister 2015-16 and is a member of the House of Lords
