Death-in-service benefits from a registered scheme will be excluded from inheritance tax (IHT)) when the government brings pensions into the IHT net in 2027.
The government confirmed this yesterday as it set out how the it plans to tax surplus pension assets after people die.
The decision to include pensions with a deceased assets when calculating an IHT liability was announced in the last Budget and due to come into effect in April 2027. The government new policy paper makes a number of changes from the original proposals. As well as ensuring that death-in-service benefits remain outside the scope of IHT, the government has said that it will be personal representatives, rather than pension scheme administrators, who will be liable for reporting the value of pension scheme assets and paying any IHT due.
Then policy paper says that this move will raise around £1.5bn by 2029/2030.
The industry supported the decision to exclude death in service benefits — typically a lump sum paid when an employee dies, that is a multiple of their salary. However there were still considerable disquiet as to how the taxation of these pension assets will work in practical terms.
Canada Life managing director for retirement Pete Maddern says: “We are pleased that the government has listened and avoided the unintended consequences that would have come with making pension scheme administrators responsible for paying inheritance tax on pension funds and death benefits.
“Aligning with the existing process will help ensure that beneficiaries receive what they are owed without delay and mean that unnecessary burdens aren’t placed on personal representatives and families at an already difficult time.
“The government has also provided welcome clarity on the scope of the proposed reforms, confirming that death in service payments will not become liable for inheritance tax. These benefits provide a critical short-term financial lifeline for loved ones following the death of a working-age earner. Including them in the scope of the changes risked much wider repercussions not only for grieving families, but also for the employers that provide these benefits for their workforce.”
Quilter pension specialist Roddy Munro says: “The government has already consulted on the policy and has thankfully listened to some responses. For example, a question mark had been left on whether death in service benefits payable from a registered pension scheme would be out of scope, which has today been confirmed.
“Additionally, significant concerns around the proposal to make pension scheme administrators (PSAs) liable for reporting and paying were noted within the consultation responses and the government has opted not to proceed with the PSA-led approach set out in the technical consultation document as a result.
“However, without further amendments, how the policy is eventually enacted risks turning a targeted tax reform into an administrative minefield. While only a small fraction of estates will pay more tax, a far greater number will face needless complexity, delays, and stress – often at the worst possible time.”
He adds: “Bringing unused pensions into the ambit of inheritance tax (IHT) is more than a technical footnote change from the Treasury. It is a seismic shift in how we now think about and plan for retirement and estate planning.
“As the policy progresses, we will continue to feed into how the government can refine and develop the process for pensions and the payment of IHT. The industry has offered workable alternatives, and it’s time for the Government to listen.”
Nucleus Financial technical services director Andrew Tully says: “Including pensions within the IHT environment will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry, and HMRC. This complex process will cause bereaved families confusion and stress at a difficult time and doesn’t fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one.”
It recently sponsored a report by TISA and Oxford Economics, which called for alternative options — which will raise a similar amount of tax but without the complexity of bringing these assets within the IHT net.
