Rachel Reeves could 'kill off' pensions with warning of 'catastrophe' to come

Former Pensions Minister Baroness Ros Altmann has warned Rachel Reeves's inheritance tax plans could "kill off" some pensions.

She urged the government to rethink proposals to charge IHT on unused pension funds, slamming the idea as "unworkable".

The life peer, who warned the move would "kill off modern pensions," said: "They will damage the direct contribution pension system, reduce contributions, accelerate withdrawals and cause misery and chaos for bereaved families.

"These new rules do not just mean a 40% tax on pension inheritances. They are a fundamental restructuring of how pension death benefits are administered and taxed, with lump sums and even funeral benefits facing a 40% tax hit."

She added that proposals to make bereaved relatives find all the pensions, identify who will inherit and then calculate and pay the IHT due within six months is "unworkable".

From April 6, 2027, most unused pension funds and death benefits will be brought within the value of a person's estate for IHT purposes.

Under current law, most unused pension pots and death benefits are not considered part of a deceased person's estate for IHT purposes.

This is because most UK registered pension schemes are structured as discretionary trusts, where the pension scheme trustees or administrators have discretion over who receives the benefits when the member dies.

As the deceased does not have a fixed entitlement to specific funds, these assets are not considered part of their estate for IHT purposes.

Baroness Altmann said: "Even professionals such as lawyers, financial advisers or accountants will struggle to meet the six months deadline, but many personal representatives (PRs) or executors of someone's will are just family members, with no experience in pensions or tax, doing this all unpaid.

"Pension Administrators are not normally notified of a member's death immediately, it can take weeks, especially if there is no will. Then the pension scheme must verify the PRs identity and authority, make reasonable enquiries as to potential beneficiaries and gather all necessary evidence before determining which benefits are to be paid to each person.

"The burden of this is being placed mostly on PRs, who will be liable to pay any inheritance tax due within six months, but will not have money from the pension funds to pay it from and will have to deal with all this at a time when they are grieving their lost loved one."

Although the Government has proposed a four-step process for dealing with unused pension funds on death, Baroness Altmann said each of these steps will take time and may not be understood by those trying to administer their loved one's estate.

She added: "There have not been enough warnings about this coming catastrophe. It's not too late to avoid this disaster - I do hope the Government will listen to reason."

A Treasury spokeswoman said: "We continue to incentivise pensions savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth - with more than 90 per cent of estates each year will continue to pay no inheritance tax after these and other changes."