Pensions could be 'nightmare' for grieving families warns ex-minister

A former Pensions Minister and retirement expert has attacked the government’s Budget day decision to include pensions and pension death benefits within estates for inheritance tax (IHT) purposes. LCP consultants partner Steve Webb warned that the announcement, from Chancellor of the Exchequer Rachel Reeves as part of the Labour government’s £40bn tax and spend Budget to "rebuild" the economy, will be a “nightmare.” Sir Steve added that the move, planned from April 2027, “could lead to massive bureaucracy”, especially for bereaved people tasked with sorting out the estates of a departed friend or loved one with pension entitlements. Ms Reeves said that the IHT exemption for pensions was never intended to be a loophole to avoid tax on pensions. Because pensions up to now have been outside a person's estate, many advisers have used unused pension cash to transfer wealth down the generations tax free. Bereaved families already face two major hurdles when it comes to dealing with IHT, a tax that is charged at 40% on the property, possessions and money of somebody who has died above a threshold of £325,000 and subject to certain exemptions. The first is that IHT bills have to be paid before probate can be secured, although organisations, such as banks or NS&I can be asked to make payments direct to HMRC towards the IHT bill from the assets of the deceased person. In addition, obtaining probate itself can take many months, which means finalising the financial affairs of the departed can be a drawn out process. On top of this, however, Sir Steve said that the government’s decision to include pensions as part of the IHT process “suggests that in cases where pensions form part of the estate, the whole process will become much more convoluted.” “This could lead to delays, including hold-ups in releasing death-in-service lump sums. These lumps sums themselves could be much reduced if subject to tax of up to 40%,” he added. According to government estimates, around 49,000 estates per year include pensions which face an IHT bill. This number is made up of 10,500 estates that would not have faced IHT if pensions were not included, and 38,500 estates that were already in the IHT net but now face an additional bill. In addition, other bereaved families who may not know the current value of a deceased person’s pensions or death benefits will have to obtain the information to check whether IHT is due or not. Sir Steve said: “The whole thing could turn into a bureaucratic nightmare for grieving families. If this proposal goes ahead, the government will need to come up with a much more streamlined process than is currently proposed.”

Pensions could be 'nightmare' for grieving families warns ex-minister

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