IHT on pensions a 'bureaucratic nightmare' for grieving families

Bereaved families might have to wait months to access the pensions they inherit from their loved ones under proposed new rules to levy inheritance tax (IHT) on the money.

In last week’s Autumn Budget, chancellor Rachel Reeves announced that from April 2027, pensions will become subject to IHT. A consultation published by the government indicates how the new rules could work, with pension administrators responsible for paying IHT before releasing the money to beneficiaries.

But experts have warned that this could make the process long and laborious for families, who will have to gather information from different pension schemes to work out whether IHT is due on the estate, and how much needs to be paid out from each scheme.  

Steve Webb, former pensions minister and partner at pension consultancy LCP, said that applying IHT on pensions would "add greatly to the burden that families face” and could “turn into a bureaucratic nightmare for grieving families”.

“People will need to know which pension schemes to contact, will have to rely on the efficient administration of pensions – with the whole process on hold until the slowest scheme has replied – and then potentially wait months more before death benefits and pension balances can be released by the scheme,” he explained. “If this proposal is to go ahead, the government will need to come up with a much more streamlined process.”

Jon Greer, head of retirement policy at Quilter, agreed that it could be “a long drawn-out process”. “The payment of pension death benefits is likely to be delayed while scheme administrators and personal representatives exchange information necessary to work out the tax due,” he said. 

Ian Dyall, head of estate planning at Evelyn Partners, deemed the issue “a bit ugly” and explained that at the moment of death, pension providers will not know how much they can pay out to the beneficiaries and how much is due to HMRC. He added that it remains to be seen whether pension schemes will be able to release at least part of the pension money before IHT is settled.

The government estimates that around 49,000 estates that include pensions will face IHT every year, including about 10,500 that will be dragged above the threshold by pensions alone. The IHT tax-free threshold is £325,000 per person, increasing to £500,000 for someone who passes their home to their children and grandchildren – so a total tax-free band of up to £1mn per married couple.

The delays could hit both families who effectively owe IHT and families who do not but don’t know the exact value of their loved one’s pensions. If an estate’s value is close to the tax-free threshold, families will still need to gather all the relevant information from pension schemes and go through the process. 
 
Webb also noted that bereaved families already face “huge challenges in winding up the financial affairs of a loved one”. For example, the process to gain probate on an estate is slow and there have been delays for months. Until probate is obtained, an inherited property cannot be sold.