Pensions and IHT: time running out for thoughtful legislation

With Parliament’s summer recess fast approaching, there is growing concern over the Government’s continued delay in publishing its final plans for introducing inheritance tax (IHT) changes to pension funds. Time is running out, and the legislative process required to implement these reforms is anything but simple.

From a legal standpoint, the proposed changes will necessitate a series of complex amendments. These must be carefully drafted, subjected to consultation, and passed into law – a process that is both time-consuming and intricate. With the Government’s target implementation date of April 2027 drawing ever closer, the urgency to begin this process cannot be overstated.

Delaying the start of this legislative journey any further risks compressing the timeline for drafting and consultation. This could force the Government to rush through critical stages, increasing the likelihood of errors that could have far-reaching consequences.

A cautionary tale can be found in the recent abolition of the lifetime allowance. That reform was also carried out within a tight two-year window. Much of the draft legislation was only published about a year before the go-live date, and unfortunately, it contained several drafting errors. In some cases, these mistakes prevented individuals from accessing or transferring their pensions. Although these issues were eventually corrected through additional legislation, the fixes came months after the policy had already taken effect.

If similar oversights occur with the IHT changes, the stakes could be even higher. Rather than individuals facing delays in accessing their pensions, bereaved families could find themselves unable to access inherited pension funds due to legislative oversights. Such a scenario would not only be distressing for families but could also undermine public confidence in the Government’s ability to manage pension policy effectively.

This risk of legislative missteps is particularly troubling given the scale of opposition already voiced by the financial advice community. Recent research from AJ Bell revealed that nearly all advisers surveyed (94%) believe the Government’s current plan to tax unused pension funds on death is misguided, a view that reflects widespread industry concern since Chancellor Rachel Reeves unveiled the proposals in her Autumn Budget in October 2024.

Many who responded to the Government’s technical consultation that closed in January 2025 have highlighted the proposals could cause significant delays and costs for bereaved families. Personal Representatives (PRs) would face complex administrative burdens, including coordinating with multiple pension schemes to calculate IHT liabilities within a tight six-month probate window.

This added complexity only deepens concerns already raised about the punitive tax burden beneficiaries could face, particularly higher-rate taxpayers, for whom the combined impact of IHT and income tax could significantly erode inherited pension value.

The proposals are already influencing saver behaviour, with concerns that individuals may withdraw pension funds prematurely to avoid future tax. This could lead to insufficient retirement income and increased reliance on state support.

Many are now advocating for simpler alternatives, such as taxing inherited pensions solely through income tax or a levying a flat tax charge on unused pension funds outside of the IHT system.

As the April 2027 deadline approaches, the window for thoughtful, well-consulted legislation is rapidly closing. A more balanced, practical solution, one that avoids double taxation and aligns with existing systems, would better serve both the public and the integrity of the UK’s pension framework.