IHT and Pensions: Exploring Alternatives

Delta, in collaboration with TISA and seven other firms, have worked on alternative proposals to HMRC’s plans to levy IHT on pensions. Oxford Economics was commissioned to analyse these alternative solutions, and to report on their findings.

Making any changes to pension death benefits will be an emotive subject, but we should recognise the Government’s principal reason for bringing pension wealth into the scope of IHT was to return pensions back to being a retirement savings vehicle, instead of accumulating wealth for inheritance planning.  The TISA report retains this principle at its heart and offers alternative proposals that can achieve the same fiscal outcome as the Government’s proposal. 

The Government’s suggested process for levying IHT on Pensions involved many interactions between pension scheme administrators, personal representatives of the deceased and beneficiaries. It includes complex calculations of the nil-rate band to be carried out in shorter timescales, which could lead to a greater risk of miscalculation or prolonged delays for paying death benefits and any associated tax.

The alternative proposals made in the TISA report, have simplicity at the forefront. Our key objectives are to:

• make it easier for members to understand what happens to pension benefits on their death;

• have a straightforward process for pension scheme administrators; and

• help protect beneficiaries in vulnerable circumstances. 

As a group we reflected on pre-2015 pension freedom practices, when wealth in pension schemes was mainly used for retirement, but we also considered pension products coming into the market today and the shift in members’ retirement choices and behaviours since the pension freedoms were introduced.  Two alternative proposals are made in the report:

• Inherited pension funds can only be taken as income if the beneficiary is a dependant (e.g. spouse).  If the beneficiary is not a dependant, then benefits exceeding £90,000 are taxed as a lump sum at the beneficiary’s marginal tax rate;

• A flat rate ‘inheritable pension tax charge’ is paid on all unused pension funds over a certain threshold.  Three thresholds have been modelled:

  
  

  1. 25% with £150,000 threshold;

  2. 30% with £200,000 threshold; and

  3. 35% with £250,000 threshold.

This report is designed to provoke informed debate and help shape the conversation on how best to meet the Government’s objectives. By offering practical, balanced alternatives, we hope to encourage constructive engagement across the industry and with policymakers — and to help ensure any changes to IHT on pensions are both fair and workable in practice.