The government has been encouraged to consider alternatives to its proposal of bringing pensions into scope of inheritance tax (IHT).

In a letter to the Chancellor, Rachel Reeves, and the Treasury, AJ Bell outlined ‘flaws’ in proposals to subject unspent pension assets to IHT on death.

In the October Budget, Reeves announced plans to consult on bringing pensions into scope of IHT, with the changes due to come into effect in April 2027.

AJ Bell called on the government to consider alternative options, which it believed would be simpler and fairer while still reforming the treatment of pensions on death.

It proposed either using a system that would be similar to the current treatment of ISAs on death, or to simply rely on income tax at the beneficiaries’ marginal rate, both of which AJ Bell believed represented preferable alternatives to the government’s proposals under consultation.

The letter stated that the ISA system provided a pre-existing template for the reform of pension taxation on death and would mean investments were treated equally as part of the estate.

Meanwhile, it argued that the option to apply income tax on withdrawals at the marginal rate of the beneficiary offered 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.

“The proposals set out by government create huge complexity and will delay families from accessing money in a timely fashion following a bereavement,” said AJ Bell CEO, Michael Summersgill.

“In some cases, the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension can’t be sold quickly.

“Add to this the fact that the proposals could result in millions of people paying a minimum tax rate of 64 per cent on inherited pensions, and there is a real risk that confidence in pensions will be seriously eroded.

“We’re urging the Chancellor to instead consider alternative proposals from the industry, which would be fairer and simpler, without undermining her plan to tax unused pensions on death.”

---