The government has been urged to "take a step back" from its plans to bring pensions into the scope of inheritance tax (IHT) and plot a new way forward, following concerns that the current proposals could risk "forcing a round peg into a square hole".

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.

However, in its response to the government's consultation on this, the Pensions Administration Standards Association (Pasa) raised concerns that the current proposals could result in two damaged systems and harm to savers and their beneficiaries.

In particular, the group warned that there has been "inadequate" consideration of pension scheme administrators (PSA) requirements.

The association explained that while the current proposals suggest that PSAs be accommodated within the existing IHT regime, this fails to account for the operational realities of managing a pension scheme, incompatibility with its own regime, or the impact this may have on beneficiaries.

The group also cautioned the government against "unrealistic" timelines, warning that while PSAs are expected to meet deadlines, this depends on timely and accurate information from personal representatives (PRs), which is often delayed due to the complexities of estate management or personal circumstances such as grief.

This reliance places PSAs in an untenable position, according to Pasa, exposing them to potential penalties for delays beyond their control.

Pasa said that the proposals would also introduce "significant responsibilities" for PSAs, including areas which would traditionally be within the remit of HMRC, which will "almost inevitably" lead to increased fees for savers and reduce service quality.

In addition to this, it warned that the complexity and inefficiencies introduced by these changes could result in delayed payments to beneficiaries during a challenging time and introduce them to process risks.

Given these concerns, the group said that "substantial adjustments" to how both tax regimes function will be needed for the changes to be successful.

In particular, it said that the IHT system will need to be adapted in order to align with the operational practices and systems of PSAs, rather than forcing PSAs to fit into the existing IHT framework.

It also encouraged the government to introduce equitable timescales, to allow PSAs to meet obligations based on the receipt of required information from PRs, and to reallocate responsibilities, to restrict the responsibility of PSAs to providing necessary pension-related data to PRs and HMRC.

However, Pasa argued that there is also a "strong case" for the proposed approach to be fundamentally changed, highlighting the concept of discretionary payments as one alternative.

"There’s a compelling case for introducing a statutory override which makes all pension death benefit payments non-discretionary and requires PSAs to pay benefits directly to a saver’s estate," Pasa's response stated.

The group acknowledged that there is "significant" procedural burden currently associated with discretionary payments, which were justifiable when discretionary payments kept benefits outside the IHT regime.

"However, the proposed changes eliminate this advantage, rendering the associated administrative burden unnecessary," the group stated. "Some schemes are already exploring rule amendments to make death payments non-discretionary."

---