Despite all the pensions-related fear and speculation that swirled around in the media during the weeks leading up to the Budget on 30 October, it was more of a case of ‘what didn’t happen to pensions’, rather than what did.
And yet what did happen is undeniably big.
The release of a Technical Consultation by HMRC entitled: “Inheritance Tax on pensions: liability, reporting and payment” outlined in very broad terms that ‘unused pension funds and death benefits’ would potentially come under the ambit of Inheritance Tax (IHT) for the first time from 6 April 2027.
The rationale underpinning this Budget announcement suggests a political side-swipe at George Osborne’s ‘Pension Freedoms’ and the taxation of pension death benefits rules, which were both introduced in April 2015.
What has evolved from those changes is an increase in individuals who accrue significant pension funds for their surviving beneficiaries that can be transferred discretionally on the individual’s death, without becoming subject to an IHT charge.
In the meantime, the individual relies on their other savings and investments to fund their retirement.
Essentially, therefore, the Chancellor wants a return to those pre-2015 days, where the overriding quid pro quo was that all the tax advantages offered to pensions was to help build up a fund for that individual’s retirement, rather than creating an IHT-free inter-generational wealth fund.
That point having been made, however, the rest of HMRC’s Technical Consultation – as its title suggests - is largely concerned with the administrative processes of calculating the IHT due on the deceased’s unspent pension funds and death benefits in scope, and then who has responsibility for paying the IHT to HMRC.
And that’s where HMRC’s pronouncements become – shall we say – “interesting”.
Responsibility for paying any IHT due on pensions will rest with the Pension Scheme Administrators (PSAs), while the surviving beneficiaries and their Personal Representatives (PRs) will need to work closely with the PSAs, to establish the values of the deceased’s pension funds and then to calculate what IHT is due.
After PRs have notified PSAs of the member’s death, PSAs will be required to provide PRs with the information on the value of any pension elements within the deceased’s estate. PSAs will be required to respond to the PRs within 2 months of receiving a request. Any IHT that is due must be received by HMRC within six months of the month in which the member died; otherwise, interest for late payment will start to accrue.
When I first saw the Consultation, I thought, “why introduce these requirements from April 2027, and not before?”
I think the answer lies in the fact that, to stand a chance of the PR obtaining all the relevant pension fund values within the required time period, Pension Dashboards will need to be fully operational and, at the current time, the ‘end date’ for their first release is October 2026.
This is all well and good where a pension fund value can be obtained ‘at the touch of a button’ from the PSAs – but what about SSASs and Full SIPPS, where the assets could include, for example, commercial property and/or unquoted shares?
It is not inconceivable that ‘arms-length’ Surveyors and Auditors will, justifiably, reflect the need for speed of their valuations within their quoted fees.
And let’s not forget that, in reality, many PRs will be one of the deceased member’s surviving beneficiaries, rather than a legally-qualified probate specialist.
The procedures and responsibilities of the PRs represent a steep mountain of understanding that needs scaling within finite timescales. With that in mind, where does the FCA’s Consumer Duty treatment of vulnerable customers by FCA-regulated PSAs fit into all this?
Okay, so HMRC is not an FCA-regulated organisation, but one of my biggest concerns at the outset of this consultation process is PSAs finding themselves in an invidious situation where they are having to place the PRs under strict timescales for a response, where the PR (for example, a grieving widow) is arguably at their most vulnerable.
Thankfully, time is on our side to respond to this initial Consultation, and I would implore all readers to mount a robust response before the closing date of 22 January, to highlight all of the potential issues and problems that the government’s wish to raise more IHT could have on pension providers and those acting on the deceased member’s behalf.
James Jones-Tinsley is a technical specialist at Barnett Waddingham on SSAS and SIPPs practice areas. He also presents to clients, advisers and other professionals on pension matters, liaising with the media on changes to pension legislation. James D Jones-Tinsley FPMI APFS, This email address is being protected from spambots. You need JavaScript enabled to view it.