Key things to look out for in January:
HMRC’s technical consultation on IHT and pensions closes on 22 January: the government wants to extend IHT to include any unused pension funds on death – this consultation is directed at devising a workable process, however there are better ways to tax pensions on death
DWP’s consultation on pensions investment review for DC schemes closes on 16 January: the government wants to revolutionise pensions by creating ‘pension megafunds’ – this consultation sets out its basis to drive consolidation on a massive scale
DWP’s consultation on consolidation of local government pension schemes closes on 16 January: there are currently over 80 different local government pension schemes and the DWP believes bringing these schemes together will create economies of scale and better outcomes for members
FCA to publish next step from ongoing advice services review: in 2024 the FCA wrote to 20 firms asking for information on their ongoing advice services following the introduction of Consumer Duty – this review should detail the FCA’s thoughts on this subject and what advisers should be looking at in their processes
1. The government needs to look at alternatives to including pensions in IHT
In the Autumn Budget, Chancellor Rachel Reeves announced that from April 2027 unused pension funds would be counted as part of the estate when working out inheritance tax (IHT) due
HMRC launched a technical consultation on IHT and pensions, which closes on 22 January 2025
AJ Bell has called on Reeves to consider alternatives to IHT on pensions, which would be simpler and fairer while still reforming the treatment of pensions on death
Tom Selby, Director of Public Policy at AJ Bell, comments: There was never any doubt that the focus of the chancellor’s first Budget would be on raising tax. The tax treatment of pensions on death always looked generous, however her plans to extend the IHT net to pensions risk backfiring on a big scale. The proposals will create huge complexity, causing delays in families being able to access money as well as potentially hiking up costs for executors and beneficiaries. This will cause misery for families, as well as additional work and costs for HMRC and pension providers. The spectre of ‘double taxation’ could result in millions of people paying a minimum tax rate of 64% on inherited pensions, resulting in a real risk that confidence in pensions will be seriously eroded.
“But it doesn’t have to be this way. We are urging the government to instead consider alternative proposals from the industry which would be fairer and simpler without undermining its plan to tax unused pensions on death. One option would be to treat pensions in a similar way to ISAs on death. ISAs are already subject to IHT, and this provides a pre-existing template for pensions and means investments are treated equally as part of the estate. Alternatively, income tax could be applied to all withdrawals at the beneficiary’s marginal rate regardless of the age at which the pension saver dies. This is not yet ‘a done deal’ – there is still time for the government to pivot and adopt a more pragmatic solution saving time, money and distress for millions of families.”
2. DWP’s consultation on ‘pension megafunds’ closes
In her inaugural Mansion House speech, the chancellor announced reforms to create pension ‘megafunds’ in an attempt to boost investment and economic growth
The government claims these changes could ‘unlock £80 billion’ of investment for infrastructure projects, mirroring similar ‘megafunds’ set up in Canada and Australia
The government is consulting on introducing a maximum number of defaults for multi-employer defined contribution schemes, as well as whether these schemes should operate at a minimum size
It also proposes that members of contract-based pensions can be transferred to better performing arrangements without individual consent
Rachel Vahey, Head of Public Policy at AJ Bell, comments: “The proposals to create pension megafunds are being billed as the first step in a pensions revolution. The government has its eye firmly on tapping into pension funds as a potential source of new UK investment, and for that to work the current landscape of thousands of schemes needs to be consolidated into a few.
“This consultation is the start of that process. But size shouldn’t be the overwhelming factor. Whether a scheme offers good value is not just how big it is, but whether it provides good outcomes for pension scheme members. It’s imperative we don’t forget about the pension saver at the heart of this revolution. Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money. If it goes well, everyone can celebrate. But it’s clearly possible that it could go the other way, so there needs to be some caution in this push to use other people’s money to drive economic growth.”
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