The UK’s pension system has long been a cornerstone of financial security for retirees and their families. However, new inheritance tax rules proposed by HMRC have sparked widespread concern, with industry experts warning of significant repercussions for beneficiaries and the pension system as a whole.
One leading voice in this debate is Michael Summersgill, CEO of AJ Bell, who has raised the alarm about how these changes could create a perfect storm for pension savers and their loved ones, resulting in higher tax bills, delayed payments, and more complex probate processes.
A Double Tax Burden: The 64% Effective Tax Rate
At the heart of the controversy is the prospect of an effective 64% tax rate on inherited pensions for higher-rate taxpayers. Under the proposed rules, beneficiaries would be hit with a double tax burden—first with inheritance tax (IHT) and then income tax on the inherited funds.
Summersgill has criticized this approach as “arguably the most complex and costly way of raising tax from unused pensions on death.” For families already navigating the emotional toll of losing a loved one, the financial blow could be devastating.
A Bottleneck in Probate: Delays for Families
In addition to the tax burden, unused pension pots will need to go through probate before they can be distributed. This requirement, which comes into effect in April 2027, has the potential to create significant delays for grieving families who rely on this money to cover immediate needs.
Summersgill warned:
“At what will be an emotionally challenging time for those close to the deceased, the process of distributing much-needed support will end up stalled in a much more complicated probate process.”
For families, this means not only dealing with their loss but also facing administrative hurdles that could stall access to crucial funds.
The Government’s Stance
A Treasury spokesperson defended the proposed changes, stating that pensions would only be subject to inheritance tax and income tax once, aligning them with the taxation of other savings. The government emphasized that pensions should primarily serve as a tool for funding retirement rather than becoming a tax-free vehicle for wealth transfer.
However, critics argue that this stance undermines the trust and purpose of the pension system, particularly for those who have diligently saved over their lifetimes with the expectation of passing on unused funds to their loved ones.
A Call for Simpler Solutions
Summersgill proposed an alternative solution: closing a specific loophole that currently allows beneficiaries to avoid income tax on pension pots when the pension holder dies before age 75. This targeted approach, he argued, would be far less disruptive than the sweeping changes currently on the table.
By addressing this loophole, the government could still raise revenue without fundamentally altering the pension system or imposing unnecessary complexity on families during a difficult time.
What This Means for You
If you’re a higher-rate taxpayer or someone planning to leave behind unused pension funds, these changes could significantly impact your family’s financial future. The double taxation and potential delays in probate emphasise the importance of strategic estate planning.
Consider these steps to protect your legacy:
- Review your pension arrangements: Speak to a financial advisor to understand how these changes could affect your beneficiaries.
- Update your will and estate plan: Ensure your documents reflect the potential probate process for pensions.
- Seek professional advice: Consult legal and tax experts to explore ways to minimise the impact of these changes on your family.
Stay Informed and Prepared
As we approach 2027, it’s crucial for UK households to stay informed about these impending changes. Whether you’re a pension saver or a beneficiary, understanding the new rules will help you make informed decisions and safeguard your financial future.
Need expert advice? Contact us today to discuss your estate planning needs.
How Aristone Solicitors Can Help
At Aristone Solicitors, we specialise in probate and estate administration. Our team is dedicated to providing comprehensive, personalised support to help you safeguard your legacy and navigate these new challenges.
Our services include:
- Professional valuations and tax calculations to ensure compliance and accuracy.
- Support with probate applications to minimize delays and streamline processes.
- Expert advice on inheritance tax (IHT) and capital gains tax (CGT) implications for beneficiaries.
- Resolving disputes between executors and beneficiaries to protect family relationships.
Take the Next Step with Confidence
If you’ve been named as an executor or need advice on estate administration, we’re here to help. Contact our probate team today:
- Luton: +44 1582 383 888
- London: +44 2034 393 888
- St Albans: +44 1727 519 888
Alternatively, complete our contact form, and one of our experts will get in touch promptly to discuss your needs.
Related Resources
- Government Guidance on Inheritance Tax and Pensions
- Understanding Probate and Estate Administration
- AJ Bell CEO Calls for Pension Taxation Reforms
By staying proactive, you can navigate these changes with confidence, ensuring your family’s financial security during challenging times.
