21 January 2025
If you are covering the closing of the government’s technical consultation into the introduction of inheritance tax on pensions tomorrow, please see the following comment from Jon Greer, head of retirement policy at Quilter:
"As the government’s consultation on taxing unused pension funds closes, we recognise the need to raise tax revenues. However, we believe the proposals as they currently stand risk creating significant problems for families, adding unnecessary complexity and delays at a time of grief.
"Under the current proposals, grieving families could face lengthy delays as executors are required to navigate a complicated process of gathering valuations, submitting forms, and paying inheritance tax on pensions alongside other assets in the estate. This not only increases the emotional and administrative burden on families but could also lead to practical challenges, such as delays in accessing funds needed for living costs or settling immediate financial obligations.
"We believe there is a better way to achieve the government’s revenue goals without causing undue stress for families or undermining the purpose of pensions. One alternative would be to reintroduce a flat-rate tax on unused pension funds after a nil rate band, similar to the system that existed prior to 2015 . Under this approach, any unused pension funds would be taxed at a clear, fixed rate once their total exceeded a nil rate band that applies across all the members schemes. This would simplify the process for families by keeping pensions distinct from the rest of the estate, avoiding the need to include them in broader inheritance tax calculations.
"A flat-rate tax has several advantages. It eliminates the risk of extreme rates of double taxation, ensures consistency for savers, and speeds up the distribution of pension funds.
"This system would also support the government’s administrative goals. By keeping the process within the existing pension tax framework, the need for lengthy estate valuations and interactions with HMRC that the IHT process would introduce would be avoided, speeding up payment and easing the burden on both families and tax authorities that the current proposed IHT process would otherwise introduce. Additionally, the flat rate could be adjusted to meet revenue targets, ensuring it is fiscally effective without being punitive. For simplicity the current income tax treatment of remaining funds on death before and after age 75 would be maintained.
"The consultation has been an important opportunity to highlight the practical issues of including pensions in IHT and the focus must be on finding practical solutions that minimise disruption for families. A flat-rate approach offers a fairer, simpler alternative that balances the government’s need for revenue with the importance of protecting pensions. We urge policymakers to carefully consider these alternatives to avoid unnecessary hardship for grieving families and ensure the tax system remains efficient and transparent."
