New regulations set to take effect next spring will require executors of estates to identify and report all pension details held by a deceased individual to His Majesty's Revenue and Customs (HMRC). Experts warn that many individuals are unprepared for these changes, which could lead to significant administrative delays, potential fines, and added stress for grieving families.
Under the current rules, pensions are generally not included in inheritance tax (IHT) calculations and can be passed on tax-free. However, from April, pensions will be incorporated into estate valuations, potentially drawing more families into paying death duty at a 40% flat rate. The standard IHT threshold begins at £325,000 per person, with an additional allowance for a main residence. These thresholds can be doubled for married couples or civil partners.
For estates valued over £2 million, the residence nil-rate band begins to be tapered. Crucially, inheritance tax must be settled before beneficiaries can access any part of an estate. Even when no tax is due, information regarding all pensions held by the deceased will need to be submitted to HMRC to prove this.
Canada Life's research indicates that nearly half of individuals over 55 have not yet appointed an executor for their estate, and an even smaller proportion have provided their chosen executor with essential pension information. Baroness Altmann, a former pensions minister, has described the upcoming changes as unworkable, highlighting the difficulty for bereaved families to gather necessary information within strict deadlines while being barred from accessing funds to pay potential taxes.
"Families who don't have this information ready could face a race against time, searching for old pension documents to meet HMRC deadlines to pay inheritance tax and avoid extra interest," said John Chew, a tax and estate planning expert at Canada Life. He emphasized that leaving a clear will and appointing a trusted executor are crucial steps to simplifying matters for loved ones.
Experts are urging individuals to create a comprehensive checklist of all pension arrangements, including workplace and personal pensions, detailing provider names, policy or account numbers, and contact information. This record should be stored securely and made easily accessible to appointed executors or loved ones.
In cases where pension information is not readily available, executors may need to file a 'missing policy declaration' with the pension provider. Delays in locating all pension assets can result in significant interest charges, currently at 7.75% per year, and penalties for late payment of inheritance tax. These penalties can range from £100 if paid six months late to up to £3,000 if the payment is over 12 months overdue, although appeals for reasonable excuses are possible.
Personal representatives, typically executors, are jointly responsible with beneficiaries for paying any inheritance tax due on pensions. They are expected to make reasonable efforts to locate all pension pots. If an additional pension is discovered after the estate has been distributed, personal representatives must notify HMRC and amend the inheritance tax return, potentially leading to additional tax and penalties.
Sarah Lister, partner in the probate team at Thomson Snell & Passmore, noted that personal representatives can protect themselves by applying for a 'clearance certificate' from HMRC. Once obtained, this certificate can release them from further inheritance tax liability on any pensions that are later discovered, provided they made 'reasonable efforts' to locate all assets during the initial estate settlement process. Proving these efforts generally involves a thorough search of the deceased's documents, digital devices, and communication with family, advisors, and previous employers.