New research published today by The Investing and Saving Alliance (TISA) proposes alternative approaches to the Government’s proposed inheritance tax (IHT) reforms to pensions which are due to be introduced from April 2027.
The alternative approaches aim to reduce the burden of dealing with complex rules and ensure grieving families avoid unnecessary delays while still achieving comparable fiscal outcomes for the Government.
TISA says it is appropriate for pensions to remain outside the IHT regime and instead have their own tax system, as pension funds are partly funded through tax relief that is not available to other savings products.
Alternative Approaches to Taxing Unused Pension Wealth, produced by Oxford Economics, outlines two models that meet the Government’s revenue and policy objectives while avoiding the risk of delays, confusion, and added pressure on bereaved families, which TISA warns will occur under current proposals.
Both approaches would remove unused pensions from IHT estate calculations entirely. Beneficiaries would either be taxed directly at their marginal rate, or alternatively, a standalone flat rate 'inheritable pension tax charge' would be due on benefits above a nil rate threshold.
TISA warns that the Government’s proposal could lead consumers to reduce contributions, draw down savings early, or move assets out of pensions altogether, weakening consumer retirement outcomes and undermining pensions adequacy.
It added that further consideration is also 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, who are often family members dealing with complex legal and financial responsibilities during bereavement.
Renny Biggins, head of retirement at TISA, said: “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.
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.
“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. 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% 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.”
Andrew Tully, technical director at Nucleus, commented: “Including pensions within the IHT environment 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. 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. This research demonstrates there are other options which 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. I hope the Government seriously consider alternatives rather than simply pushing ahead with the proposed complex and punitive rules.”
Jon Greer, head of retirement policy at Quilter, added: “The proposals offer pragmatic and proportionate alternatives to the government’s current IHT plans for unused pensions. They would reduce the delays and complexity that grieving families and personal representatives would otherwise face. Crucially, these models deliver fiscal certainty without the administrative burden of IHT, supporting the policy intent to prevent pensions 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.”
