Grieving families will be forced to pay inheritance tax (IHT) on pensions after ministers decided to press ahead with reforms despite a fierce backlash.
Rachel Reeves announced in last year’s Budget that unspent pensions would be added to estates from April 2027 in a move that is expected to raise more than £1bn a year for the Exchequer by the end of the decade.
However, while it previously thought that pension providers would be responsible for calculating and paying any death duties, HM Revenue & Customs (HMRC) has confirmed this will instead be the responsibility of the “personal representative”, or executor, of the estate.
Death in service payments, meanwhile, will be exempt, ministers confirmed as they published the results of a consultation on how the scheme will work.
The government estimates that around 10,500 estates will become newly liable for inheritance tax under the changes in 2027.
Polling earlier this month found the move was the most unpopular tax measure announced by Labour since entering office. Just a fifth of Britons (21 per cent) supported the policy, while 44 per cent were opposed.
Sir Steve Webb, a former pensions minister, told the Times: “Life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top. In future, the person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the IHT bill.
“Complications will no doubt arise where the family member cannot track down all of the deceased’s pensions or where providers are slow to supply the information needed to work out the IHT bill.”
He called for “serious thought” to be given to changing the rules around penalties for late payment.
Pete Maddern from the insurer Canada Life said death in service benefits “provide a critical short-term financial lifeline for loved ones following the death of a working-age earner. Including them in the changes risked much wider repercussions not only for grieving families, but also for the employers that provide these benefits for their workforce.”
It was released just a day after cabinet minister Liz Kendall warned Britain faces a “tsunami of pensioner poverty” without major reform to the system, as she launched a review of the state pension age, opening the door for it to be increased.
Age UK warns those looking to retire in 2050 are already on course to receive £800 per year less than current pensioners.
The state pension age is currently 66 but is already set to rise to 67 in 2028 and 68 by 2046.
Labour has already come under fire for the so-called ‘tractor tax’, an inheritance tax raid which critics warn could sound the death knell for family farms in England.
Under those changes farms valued at £1m or more will be liable for 20 per cent inheritance tax for the first time.
