The government’s proposed changes to the taxation of inherited pension pots from April 2027 have raised concerns in the pension industry. Michael Summersgill, a notable executive in the retail investment sector, warned that the changes risk “fundamentally undermining” the UK pensions system. Under the new rules, pension pots would no longer be passed on tax-free.
The Treasury estimates that the move would raise nearly £1.5bn annually by 2030. Summersgill argued that higher-rate taxpayers would face an effective tax rate of 64 per cent on the inherited funds, as they would be subject to both inheritance and income tax. Recipients could also face delays in receiving the savings, as unused pots would have to go through probate before being distributed from April 2027.
At what will be an emotionally challenging time for those close to the deceased… the process of distributing much-needed support will end up stalled in a much more complicated probate process,” Summersgill wrote. Instead of pushing ahead with the plans, he suggested the government should get rid of a loophole which enables beneficiaries to avoid income tax on a pension pot if the pensioner dies before 75.
Taxation policy sparks industry fears
A Treasury spokesperson said: “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth.
The government expects pension scheme administrators to calculate and pay any inheritance tax owed on retirement pots directly to HM Revenue & Customs. The executor of the estate will remain responsible for paying inheritance tax owed on any other assets. The executor will notify the administrators of all the pension schemes and request details such as fund values and death benefit entitlements.
The pension scheme must reply within two months. Once they get details of the pension, the executor can calculate the value of the estate and inform the pension firm about any leftover inheritance tax allowances, which can be deducted from the value of the pension pot. The pension scheme administrator will then be responsible for calculating and paying any inheritance tax due on the pension funds, and the executor will do the same for the remaining estate.
Each party will be separately liable for any interest incurred for late payments. Critics argue that the six-month deadline to pay inheritance tax should be increased to reflect the new and protracted process. Doubling it to 12 months would recognize that grief can make everyday tasks insurmountable without having to navigate complex tax rules and red tape.
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