- AJ Bell research shows almost all advisers (94%) believe that inheritance tax (IHT) is not the best way to tax pensions on death*
- Under the current proposed changes, unused pensions funds would be subject to IHT on death from April 2027
- Charging income tax on all inherited pensions (42%) and levying a flat tax charge on unspent pensions on death (44%) were relatively popular alternatives among advisers
- Over half (53%) of advisers have had new clients approaching them seeking advice as a result of Rachel Reeves’ proposed plans to impose IHT on death, with over 4-in-5 (84%) saying queries around estate planning have increased
- Almost two-thirds (63%) of advisers have seen clients request to access their pensions and 62% have asked about gifting rules
- This has seen 64% of advisers recommend clients access their pensions earlier than previously planned, as well as almost half (49%) recommending clients take advantage of gifting rules and a third (34%) suggesting they update expression of wishes forms
- AJ Bell has urged the government to go back to the drawing board, highlighting its concerns that the proposals are unworkable and offering potential alternative solutions in a joint letter with other providers to the chancellor in November and in response to HMRC’s consultation in January
Rachel Vahey, head of public policy at AJ Bell, comments:
“Advisers strongly oppose the government’s plan to impose IHT on pensions on death. Nearly all advisers asked (94%) do not believe the government’s current intended taxing of unused pension funds on death to be the right course of action, echoing the industry-wide concerns expressed since Rachel Reeves announced the plans in her Autumn Budget last October.
“Our research shows advisers agree that the current proposals are unworkable and have the potential to wreak havoc in the industry, instead showing their support to put in place simpler, less catastrophic solutions such as charging income tax on inherited pensions or levying a flat tax charge on unused pension funds.
“On top of the administrative nightmare for families dealing with bereavement, the current proposals will result in additional complexity and costs for executors as they struggle to untangle the implications of pensions, set up under trust, being caught by the IHT net. To add insult to injury, beneficiaries could also feel the double whammy of both IHT and income tax on their inherited pensions, meaning higher-rate taxpayers facing a marginal rate of tax of at least 64%.
“The response to these proposals is already being felt, even though nothing is yet final. Over half of advisers are seeing new clients come to them for advice on how to prepare for any changes in April 2027, with over 8-in-10 reporting an increase in queries around estate planning – both a direct impact of the government’s proposed plans.
“Almost two-thirds are also recommending that clients access their pensions earlier and just under half have suggested clients take advantage of gifting rules, with a third recommending clients update their expression of wishes forms. Again, this has all come off the back of Reeves’ announcement in October and the government’s subsequent silence despite the noise from the pensions (and other) industries. Given that nothing is yet final, the fact many people are already making decisions about their long-term finances is concerning, but it is understandable that clients want to explore their options and take action.
“Rather than pressing ahead with what is clearly a flawed plan, the Treasury must consider pragmatic alternatives such as applying income tax on death or simply following the template currently in place to apply IHT to ISAs on death. There is still time for ministers to see sense and deliver a workable solution by April 2027, but first they will need to acknowledge the clear problems that the current proposals will create.
“It’s up to the government to respond in a timely fashion to avoid pension savers making potentially damaging long-term decisions before they know the lay of the land. The Treasury now needs to work constructively with advisers, their clients and the pensions industry over the next two years to find a sensible and proportionate solution for all parties involved.”
*Based on an online survey of 301 financial advisers carried out by AJ Bell between 14 March and 2 April 2025.
Government proposals
“The government’s technical consultation closed in January on proposals to introduce an IHT liability on unused pension assets on death from April 2027. The proposals mean any unspent pension assets on death will be treated as part of the individual’s estate and may be subject to IHT.
“Once passed to the beneficiary, income withdrawn from the pension may then also be subject to income tax at their own marginal rate, depending on the age of the member when they died.
“The double taxation proposed means that pension assets will be subject to a 64% effective tax rate on death where the pension pot exceeds the IHT nil rate band allocated to the pension and the beneficiary is a higher rate taxpayer, rising to as much as 90% or more where the residence nil rate band is tapered away entirely.”
Proposals will lead to delays and additional costs
“In addition to the potential for punitive levels of taxation, the proposals under consultation are likely to cause significant delays distributing money to families on death and paying any IHT due, leading to the risk of substantial late interest payments being added on.
“Personal representatives (PRs) will be required to tell pension schemes promptly of the death and then engage with each pension scheme to find out how much pension money is left and who will receive it. Only then can the PRs work out if any IHT is due, and how to apportion the nil rate band between each pension scheme and the wider estate. Pension schemes need this information to pay any IHT by deducting it from the pension fund.
“Calculation and payment of IHT is already a burdensome and complicated process. But trying to cram pensions into the six-month probate window will cause further delays, costs, and distress for bereaved families.
“Liquidity also presents a major challenge under the current proposals. Pension funds holding illiquid assets – something the government and the FCA are specifically trying to encourage through the creation of long-term asset funds (LTAFs) and wider policy initiatives – will often struggle to sell these within a year, let alone six months. This makes the levying of late interest payments (a rate of 4% above base rate) to be almost inevitable.”
Change in pension saver behaviour
“There are also widespread concerns over how these proposals will – and indeed as we’ve seen are already – changing pension saver behaviour.
“Some pension savers will choose to withdraw their funds at a faster rate, leaving less in the pension. They may choose to gift these funds to others to avoid future IHT or invest in more risky investments or products, which may not be suitable for their personal circumstances, to mitigate the IHT due.
“By encouraging a faster withdrawal of pension funds, there is a real danger that more people will leave themselves with insufficient income to last their lifetime, risking falling onto the state for support in their later years. It could also have implications for funding long-term care, as people who deplete their pension earlier will have fewer resources to pay for that care.
“Needless to say, these concerns around changes to pension saver behaviour and the associated impacts risk exacerbating the challenges that already exist in this policy area.”
Alternative proposals
“AJ Bell is instead calling on the chancellor to explore alternative measures put forward by the industry as part of the consultation process.
“The business has suggested two options, which it believes would be simpler and fairer:
- Income tax applied on withdrawals at the marginal rate of the beneficiary would be a far simpler alternative. This offers a fair system in which those inheriting pensions with the highest incomes pay more tax, while also offering simplicity given pension assets are already subject to income tax where the member dies after age 75.
- A flat rate of tax applied on death to all unspent pension funds. This would be clear and simple for people to understand and to plan accordingly.”
