Former Pensions Minister warns “nightmare” IHT reforms risk not working in practice

Planned changes to the inheritance tax (IHT) treatment of pensions risk creating significant complexity for estates and could prove difficult to operate in practice, former Pensions Minister Baroness Ros Altmann has warned.

Speaking earlier this week at an Irwin Mitchell event for advisers to high-net-worth individuals, Baroness Altmann described the reforms due to take effect in April 2027 as a “nightmare” which could have far-reaching consequences for estate planning and the wider pensions system.

She said the structure of the regime could leave personal representatives responsible for settling tax liabilities on pension assets outside their direct control, often without full visibility of those assets, increasing the risk of delays, disputes and costly errors.

“I think there’s a strong chance these new rules will simply not work in practice. The proposals are a nightmare are too complex and place unrealistic demands on those responsible for administering estates.

“This policy is fraught with dangers. Reading the HMRC guides, you just think how on earth can people actually do this if they don't know anything about pensions?”

Under the proposed system, unused pension funds will be brought within the IHT regime, meaning they could be subject to a 40% charge on death alongside existing income tax rules, with new obligations placed on personal representatives to report and help settle those liabilities.

Baroness Altmann, who served as Minister of State for Pensions from May 2015 to July 2016, also raised concerns about the wider behavioural impact of the reforms, warning they risk undermining long-standing policy objectives to encourage pension saving.

“You cannot encourage people to build pension wealth for later life and then penalise them after they do.”

She added that the proposals could incentivise earlier withdrawals and cut across the Government’s ambitions for long-term investment.

Other speakers at the lunchtime event included Naomi Neville, a partner and estate planning specialist at Irwin Mitchell Private Client Advisory. Naomi said the reforms will require a far more proactive and coordinated approach for individuals with significant pension wealth.

“The priority now is preparation. That means developing a clear picture of pension holdings, reviewing beneficiary nominations and ensuring pension arrangements are aligned with wills and wider estate structures. Without that joined-up approach there is a real risk of delays, unintended outcomes and unnecessary tax exposure.”

Penny Cogher, pensions partner at Irwin Mitchell, highlighted the practical challenges the changes will create for schemes and administrator.

“Many individuals have multiple pension arrangements built up over time, often with incomplete records, and schemes will need to identify beneficiaries, verify information and process payments within tight statutory deadlines. The combination of fragmented data, complex rules and strict timelines presents a significant operational challenge.”

John Bunker, a tax consultant at Irwin Mitchell who has been closely involved in industry discussions on the pension IHT reforms, said the changes introduce a fundamental structural challenge.

“Personal representatives are being made responsible for an inheritance tax liability on pension assets they don’t control and, in some cases, may not even know exist. That creates a level of complexity which will be difficult to manage in practice, particularly where estates are already dealing with multiple assets and beneficiaries.

 

“The key challenge now is helping clients and advisers navigate that complexity ahead of implementation.”

Baroness Altmann also questioned why a simpler approach, such as a flat rate tax on unused pension funds at death, had not been adopted, arguing this could provide greater clarity and avoid much of the complexity now facing advisers and their clients.

With the current political uncertainty at the top of government creating further questions over the future direction of tax policy, there is growing concern that mixed messages could lead some individuals to delay planning at a critical time.

However, advisers warn that the current position remains unchanged, and that individuals with significant pension wealth should not lose sight of the need to prepare for the reforms as they stand, given their potential impact from April 2027.

With aspects of the regime still evolving and further guidance expected, there are growing calls for clarity ahead of implementation, amid concern that without refinement the changes risk introducing unnecessary complexity into an already challenging area of financial planning.

Despite serving under a Conservative government, Baroness Ros Altmann is now an independent voice on pensions policy. She has built a reputation for campaigning on behalf of consumers, most notably leading efforts to secure compensation for workers who lost their pensions in collapsed final salary schemes and playing a key role in the creation of the Pension Protection Fund. Throughout her career she has been known for highlighting systemic issues across the pensions and retirement landscape.