The government has been urged to rethink its plans to bring pensions into the scope of inheritance tax (IHT) after research from The Investing and Saving Alliance (TISA) proposed alternative approaches that would reduce the burden of complex rules and delays while achieving comparable government fiscal outcomes.

The 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 Autumn Budget last year and launched a consultation on the plans shortly after this.

However, the two alternative models set out in the report shared by TISAAlternative Approaches to Taxing Unused Pension Wealth, which was produced by Oxford Economics, would remove unused pensions from IHT estate calculations entirely.

The first proposal would mean that inherited pension pots and defined benefit (DB) lump sum death benefits could only be taken as taxable income over time if the beneficiary is a dependant.

If this is not the case, then the beneficiary must take the full pension value as a lump sum paying income tax at their marginal rate, with no difference in tax based on death age and the tax would applies after the deceased’s remaining unused fund exceeds £90,000.

Under the second proposal, a standalone flat rate “inheritable pension tax charge” is paid on all unused pension funds and DB lump sum death benefits above a threshold, with the threshold being individual and no spousal exemption.

Separately, the age-based income tax rules remain: if the individual is under 75, it is tax-free; if they are over 75, it is taxed at the recipient's marginal rate.

These approaches aim to meet the government’s revenue and policy objectives, reduce the burden of dealing with complex rules while avoiding the risk of delays, confusion and added pressure on bereaved families, which TISA warns will occur under current proposals.

TISA said these alternatives would provide certainty for consumers, helping them save with confidence and awareness of their tax position on death.

“The government’s proposal to include unused pension funds within IHT risks creating unnecessary stress and delays for grieving families and causing long-term behavioural change among consumers that we don’t yet fully understand, particularly around pension contribution levels and withdrawals,” TISA head of retirement, Renny Biggins, explained.

“Instead, our research offers alternative approaches to consider, which would protect vulnerable people, support grieving families, and preserve confidence in pension saving.

“We show that you can still meet the government’s fiscal and policy goals without creating additional issues and concerns for people at the worst possible time.”

TISA noted the government’s proposal could result in consumers reducing contributions, drawing down savings early, or moving assets out of pensions altogether, which it said could weaken consumer retirement outcomes and undermine pensions' adequacy.

In light of this, the proposals are designed to avoid these unintended behavioural consequences.

The alliance also said that further consideration is needed regarding the interaction between annuity death benefits and any future regime.

The alternative approaches would integrate with existing HMRC processes and avoid increasing pressure on personal representatives, often bereaving family members dealing with complex legal and financial responsibilities.

Nucleus technical director, Andrew Tully, raised concerns about the government including pensions within the IHT environment, suggesting that this 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,” he said.

“Most importantly, it will significantly slow down the payment of death benefits and mean many beneficiaries will lose out financially after IHT late payment interest penalties are levied.”

Given this, Tully said the research demonstrates other options that allow the government to increase its tax take on wealthier people passing on pension wealth while avoiding the numerous problems created by bringing pensions into IHT.

He emphasised that he hopes the government “seriously consider” alternatives rather than simply pushing ahead with the proposed “complex and punitive rules”.

Quilter head of retirement policy, Jon Greer, added that these proposed models deliver fiscal certainty without the administrative burden of IHT, supporting the policy intent to prevent pensions from being used for wealth transfer and providing greater clarity for pension scheme members.

“It is critical that policymakers listen to the industry to ensure a more balanced approach that provides confidence for pension members and delivers better outcomes,” Greer said.

Additionally, AJ Bell director of public policy, Tom Selby, said that the alternatives set out in the paper would be “infinitely simpler” and achieve “exactly the same annual cost saving to the Exchequer”.

Delta Financial Systems, product manager, Natasha Moss, also noted the simplicity of these alternative approaches, stating that they support “better understanding for members and smoother delivery for administrators”.

Moss added that it hopes this encourages further engagement between the government and the industry to find a “fairer way forward”.

Canada Life UK managing director, retirement, Pete Maddern, highlighted that it is “particularly concerning” that annuities and death in service benefits are also set to be captured by the government’s proposals, despite him pointing out that these products working in “fundamentally different ways” to pensions.

“Death in service benefits, in particular, provide a critical short-term financial lifeline for families coping with the loss of a working-age earner, ensuring they can assess funds without delays or the need for probate,” Maddern added.

“The proposals outlined in TISA’s paper are credible and proportionate alternatives to achieving the government’s policy objectives and fiscal goals while delivering a fairer and simpler solution for consumers.”

Hargreaves Lansdown head of government affairs & public policy, Anne Fairweather, said the report sparks a “much-needed debate”.

“Exploring alternatives will mean we can reduce complexity and make sure that grieving families are not put under financial strain due to delays in receiving their money,” Fairweather noted. “We also need to explore how these pensions are taxed both pre and post crystallisation to ensure families are not unfairly penalised.”
 
“The two alternatives we’ve set out offer a simple and proportionate approach, taxing beneficiaries on what they receive in a way that still discourages the use of pensions as a wealth transfer vehicle but does not pull unused pensions into the complex inheritance tax system,” Biggins added.

“Our proposals would ease the burden on scheme members, beneficiaries and the industry, while also supporting the government’s goal to reduce regulatory costs by 25 per cent this parliament.

“We hope this report prompts further discussion between industry and government to revisit the current approach and deliver a fairer outcome for all.”

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