HMRC warned new inheritance tax rules 'fundamentally undermine' pension system

UK higher-rate taxpayers risk 64 per cent of their inherited pensions being gobbled up by HMRC. A leading expert has also warned UK households could face delays in receiving pension cash, because unused retirement pots will have to be pushed through probate before being distributed.

Michael Summersgill, the chief executive of AJ Bell, has warned that the government risks "fundamentally undermining" the pension system. Summersgill described the government's approach as "arguably the most complex and costly way of raising tax from unused pensions on death."

According to Summersgill, higher-rate taxpayers would face a particularly heavy burden under the new rules. He warned that beneficiaries could end up paying an effective tax rate of 64 per cent on inherited funds, as they would be subject to both inheritance and income tax.

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"At what will be an emotionally challenging time for those close to the deceased… the process of distributing much-needed support will end up stalled in a much more complicated probate process," Summersgill wrote in his letter. Mr Summersgill said the changes risked leaving higher-rate taxpayers paying, in effect, a rate of 64 per cent on an inherited pension.

He also warned that beneficiaries could face delays in receiving the pension money, since unused retirement pots will have to go through probate before being distributed from April 2027. "At what will be an emotionally challenging time for those close to the deceased . . . the process of distributing much-needed support will end up stalled in a much more complicated probate process,” he told Labour Party government Chancellor Rachel Reeves.

Rather than implementing the proposed changes, Summersgill suggested an alternative approach to pension taxation. He recommended closing a specific loophole that currently allows beneficiaries to avoid income tax on pension pots when the pensioner dies before age 75.

A Treasury spokesperson said inherited pensions will be subject to “inheritance tax once and, if due, income tax once, as is the case with other savings”. “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth.”