Question to the HM Treasury:

To ask His Majesty's Government what estimate they have made of the impact of specifically levying (1) 10 per cent or (2) 20 per cent on unused pensions at death, instead of requiring the pension fund to be administered as part of the person's estate for inheritance tax purposes.

Most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes from 6 April 2027. This removes distortions from changes that have been made to pensions tax policy over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than as a way to fund retirement. These reforms also remove inconsistencies in the inheritance tax treatment of different types of pensions.

A flat rate tax charge would be a very different policy with very different impacts. Fewer than 10% of estates annually are forecast to have an inheritance tax liability in the coming years. A flat rate tax charge on pensions would impact a different, and large, population of individuals below the current inheritance tax thresholds. This approach would not be equitable as it would require the majority of estates to pay more so that a small share of estates could pay less.

If the flat rate is set at a lower rate than the current rate of inheritance tax, this would lead to unused pension funds being taxed more lightly than other assets subject to inheritance tax at a rate of 40%. This would likely mean that pensions would continue to be used as a tax planning vehicle for the wealthiest individuals.