The government should consider “less costly, quicker, and ultimately more effective” alternatives to its plans to bring pensions into the scope of inheritance tax, the Society of Pension Professionals (SPP) has said.

Chancellor, Rachel Reeves, previously announced plans to remove the concession for pension pots to be passed on to anyone free of IHT as part of her inaugural Budget last year, launching a consultation on the plans shortly after this.

However, the SPP's response identified a number of problems that could be caused by the proposals, including the potential for "significant" delays in paying out benefits, causing unnecessary financial hardship to some beneficiaries.

The SPP argued that the proposals are also unclear as to what is and isn’t in scope, impose "unrealistic and impractical" timescales, and apply interest charges or penalties on pension scheme administrators (PSA) for delays over which they have little or no control.

These concerns were echoed by Broadstone, which, whilst supportive of the government’s objective to ensure that pensions are used for the primary purpose of providing an income for the member, raised concerns around the treatment of taxation around the value and control of lump sums both from defined benefit (DB) schemes and from death in service policies.

Broadstone head of policy, David Brooks, said: “It is understandable that the government is reforming the IHT regime to ensure pensions are used for their primary purpose of providing income in retirement rather than enabling wealth transfer.”

“However, we believe there are a few elements of the proposals that could be loosened, particularly where the primary purpose of lump sum payments is not for estate management.

"Tightening this regulation will create an IHT framework that ensures tax reforms are born by those with the broadest shoulders without unnecessarily penalising pension savers and their families in emotional and stressful circumstances.”

The Pensions Administration Standards Association (Pasa) also previously raised concerns around the impact of the proposals on PSAs, arguing that the current proposals could risk "forcing a round peg into a square hole".

Given these concerns, the SPP encouraged the government to consider two viable alternatives that will be, “less costly, quicker, and ultimately more effective.”

The first option outlined by SPP would be to continue using existing payment methods, and to leave the calculation and payment of IHT to the personal representative (PR) and HMRC.

Alternatively, the SPP suggested that the government could look for the benefit to be taxed in full at 40 per cent (or whatever the main rate of taxation is) and paid promptly by the PSA in the minority of cases where a pension is subject to IHT.

The SPP said that this would not apply in most cases as there will be no liability, including, for example, where the spouse is the beneficiary.

The impact could be further moderated by introducing a de minimis limit, and by an option for the PR to voluntarily certify to the PSA that no IHT is payable.

This, according to the SPP's response, could be a "genuine win-win solution", as HMRC gets its tax quicker, and beneficiaries get their money quicker.

SPP tax group chair, Steve Hitchiner, said: “The decision to impose Inheritance Tax on unused pension pots from April 2027 is perhaps unsurprising, particularly given the government’s estimated savings of around £1.5bn annually by 2030.

"To raise this revenue, issues relating to the reporting and payment of this tax are vitally important.

"The current proposals will result in numerous problems and challenges which could be largely avoided by adopting either of the SPPs recommended alternatives."

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