How inheritance tax changes could be the next pensions admin nightmare
Read Karla's latest blog on the changes that are needed to the proposed Inheritance Tax (IHT) reporting regime to prevent it from becoming the latest pensions administration headache.
How inheritance tax changes could be the next pensions admin nightmare
Ah, inheritance tax (IHT) – that delightful topic that combines the solemnity of death with the bureaucracy of taxation.
In a move that’s sure to set pulses racing (ironically), the Government’s latest consultation proposes changes to IHT reporting and payment processes for pension schemes. And it’s safe to say, we’ve got questions. A lot of them.
Trafalgar House – where we like our pensions delivered efficiently and without undue drama – has been poring over the proposals. And, quite frankly, it seems like the pensions world is about to be handed a glittering baton of chaos. Here are some highlights (or lowlights) from what we found.
The six-month rule: a marathon, not a sprint
Let’s start with the timeline. The consultation suggests using the date of death as the starting point for the six-month reporting period. On the surface, that might seem logical – but in reality, it creates unnecessary challenges for both bereaved families and pensions administrators.
Losing a loved one is an incredibly difficult time and navigating financial and legal processes only adds to the stress. Death notifications are rarely immediate, especially when dealing with overseas estates, complex family situations, or delays in official paperwork come into play. Expecting Personal Representatives (PRs) to act within a rigid timeline – before they’ve had a chance to process what needs to be done – only risks making an already difficult situation even harder.
A more compassionate approach would be to start the clock from the date PRs formally notify the scheme. This would ensure that grieving families aren’t pressured into navigating complex processes too quickly, while also giving administrators the time they need to handle matters properly. It’s about striking the right balance – providing clarity and efficiency while respecting the reality of the situation.
Financial risks: administrators, the unintentional gamblers
Here’s where things get a bit spicy. If inheritance tax isn’t paid on time, late payment interest applies. Fair enough. But can administrators deduct this from the estate, or do they foot the bill themselves? The consultation doesn’t say. So now scheme administrators are left to guess whether they’ll be stuck with the tab – a high-stakes game nobody signed up for.
And then there’s the wildcard of discretionary cases. When benefits go to anyone who’s not a legal spouse or civil partner, unexpected tax liabilities could pop up faster than a surprise party. Only less fun.
The two-year rule: when statutory deadlines meet reality
The trusty two-year rule for processing death benefits. It’s already tricky to meet, thanks to complex cases and good old-fashioned delays. Now, add the proposed IHT calculations into the mix, and you’ve got a recipe for breaching the rule more often than not. Trustees will be left scratching their heads – and recipients might be left writing angry letters to their MPs.
Our wish list for a saner approach
If we were writing a wish list for the pensions administration industry, here’s what we’d ask for:
- Start the reporting clock at notification, not death: This isn’t just common sense; it’s basic fairness.
- Clarify late payment interest rules: Administrators need to know who’s footing the bill.
- Streamline for complexity: Special guidance is a must for death in service lump sums (LSDBs) and other tricky scenarios.
And let’s not forget the importance of giving the pensions world time to adjust. Training staff, updating systems, and rewriting communications aren’t overnight tasks. A little lead-in time can go a long way.
A closing thought: the unintended administrator workout
If these changes go ahead as proposed, scheme administrators are in for a rigorous workout. They’ll need to juggle tighter deadlines, heftier reporting responsibilities, and some serious guesswork around the rules. It’s a bit like competing in a triathlon – only without the celebratory finish line beer.
While we understand the Government’s intent (compliance, revenue, and all that jazz), the execution feels like someone’s trying to untangle a set of fairy lights and ending up with a bigger knot. With some tweaks and a collaborative approach, we could all avoid turning pensions admin into the next great British farce.
So, here’s hoping the consultation feedback isn’t just filed away in a drawer marked Wishful Thinking. For now, we’ll keep sharpening our pencils – and our sense of humour – because we’re going to need both.
This blog first appeared in Pension Funds Online on 7 February 2025
