Inheritance tax bombshell could hit grieving families in key pension benefit change | Personal Finance | Finance

Some of the UK’s largest employers are reportedly looking at whether to scrap a pension benefit, which pays out lump sums to the families of workers who die while in service. Pensions consultancy, WTW which advises some of the UK’s biggest companies, said 87% of clients it had spoken to were now reviewing the so-called death-in-service benefit, in preparation for upcoming changes to inheritance tax.

In her maiden Budget, Reeves said any unused pension funds and death benefits will be subject to Inheritance Tax (IHT) but the Firefighters Pension Advisory Scheme (England) was reported as have written to HMRC warning that families of its members who die on duty would find themselves with a huge tax bill.

The changes brought in by Reeves are due to come into effect on 6 April 2027, but the chancellor has been consulting with pension providers and consultants on how to introduce them.

Kate Smith, head of pensions at Aegon, said the pensions industry would be urged the Chancellor not to ‘shoehorn’ unused pension and death benefits being shoehorned into the Inheritance Tax regime.

She said: “This is unworkable and riddled with issues. IHT is already complex, and including pensions within the regime makes it even more so.”

Smith said HMRC to explore simpler alternatives, such as levying a tax on pensions in scope where above a certain level.

“For example, the first £100,000 of unused pensions on death would be inherited free of the new pension tax charge. This also has the added benefit of avoiding encouraging individuals to run down their pension too quickly to avoid an IHT charge.

“If HMRC does proceed with its proposals and tries to retrofit pensions into the IHT regime, we believe a number of fundamental changes are needed.

Helen Perrin, head of financial planning UK at WTW said employers were reviewing their arrangements in anticipation of the changes coming in.