TISA responds to HMRC consultation: Technical consultation - Inheritance Tax on pensions: liability, reporting and payment

TISA responds to HMRC consultation: Technical consultation – Inheritance Tax on pensions: liability, reporting and payment

January 20, 2025

Renny Biggins, Head of Retirement at TISA highlights:

We strongly agree that the main purpose of saving into a private pension is to provide an income in retirement. However, the generous tax treatment on death does mean they are used by some as a vehicle through which wealth can be accrued with the benefit of marginal rate tax relief and tax-free investment growth, for the specific purpose of estate planning. As such, we agree with the policy intent of introducing a policy which reduces these benefits and incentivises pensions being used for their originally designated purpose.

We are encouraging people to do the right thing and save for their retirement, but they will be doing so without an understanding of what this will mean from an IHT perspective on death. The uncertainty of whether current or increased pension saving levels might lead to an IHT charge in the future may result in individuals reducing or delaying planned contribution increases, to ensure they remain well below the threshold. This would clearly be a very poor outcome and creates a direct conflict between these proposals and wider government objectives to boost personal saving and financial resilience in later life.

The proposals do not discriminate between those more-wealthy individuals who are deliberately using pensions as a wealth transfer vehicle and those who are simply doing the right thing and saving for later life. It is challenging to achieve the distinction between these groups if pension entitlements are bundled into the total estate value, however if pensions retained their existing IHT status and an additional charge was instead levied as a standalone inheritance charge, this could be mitigated to an extent through the introduction of a nil rate band or de minimis. Whilst there are options to adapt the existing process to make this more workable from a beneficiary and PSA perspective which we have outlined throughout this consultation response, our primary recommendation is to change the fundamental approach and instead, create a new tax charge on death akin to pre-pension freedoms and the LTA excess. Introduce a flat rate ‘inheritance tax charge’ on death after NMPA, set at a % that generates the same revenue as the IHT proposal.

The potential inclusion of products such as Group Life Assurance (GLA), extends the scope beyond pensions and the original policy intent as well as creating the need for a different process. These benefits cannot be used to accrue wealth and use as wealth transfer vehicles and would also bring into scope individuals who have not even reached Normal Minimum Pension Age (NMPA). Additionally, the main purpose of GLA is to protect the immediate financial future of a family who loses a working age earner, providing quick access to funds without the need for probate or a lengthy process to determine the funds payable. These are crucial factors which need to be taken into consideration when deciding on the scope of these proposals. Similarly, from a pension perspective, the proposals do not provide any concessions for scenarios where death occurs before NMPA is reached (and therefore there is no ability to drawdown any pension benefits) or where the death is a child (and therefore an extremely low likelihood of exceeding the IHT threshold).

Read the full response from TISA here: IHT-and-Pensions-final.pdf