Bringing pensions within scope of inheritance tax
The government has published a response to consultation, a policy paper and draft legislation (open for technical consultation until September 15) on bringing pensions within the scope of Inheritance Tax (IHT). As expected, most unused pension funds and death benefits will be brought within the value of a person’s estate for IHT purposes for deaths on or after April 6, 2027. The new documents provide more detail on how this will work:
- Death in service benefits payable from a registered pension scheme and dependants’ scheme pensions from a DB or collective money purchase arrangement will not fall into the IHT estate, whether discretionary or non-discretionary (i.e., whether or not a deceased member’s nomination of a beneficiary is binding).
- The government has changed its proposal that pension scheme administrators (PSAs) should be responsible for reporting and paying any IHT due, following significant push-back—this responsibility will now lie with personal representatives (PRs).
- There will be different ways of settling the IHT bill, one of which will be a new scheme through which beneficiaries can direct PSAs to pay the IHT on their behalf directly to HMRC (similar to Scheme Pays).
- PSAs will have new duties to support PRs. This will include being required to share the value of any unused pension funds or death benefits with the PRs within four weeks of receiving notification of the member’s death. There will also be new obligations to communicate the potential tax consequences of decisions to members and their beneficiaries. The government will work with industry to refine the process.
- HMRC will make provision to avoid double taxation (i.e., beneficiaries paying both IHT and income tax on pension benefits) via an offset mechanism.
- HMRC will provide PRs, PSAs and beneficiaries with "clear guidance, a calculator to advise whether Inheritance Tax is due, and a straightforward system to pay the tax liability".
- The deadline for paying IHT will remain at six months, despite requests to extend this.
The intended IHT treatment of certain types of benefit remains unclear, and we will be seeking further clarification on these points. Trustees and administrators should review their current rules and processes in light of the future changes—please speak to your usual A&O Shearman adviser for further advice on this. Trustees should also plan to update member booklets and other communications in advance of implementation in April 2027.
Read the response to consultation, policy paper and draft legislation.
Pensions commission to examine pensions adequacy
The government has announced that it will re-launch the Pensions Commission (which previously worked to build consensus on auto-enrolment) to make recommendations to improve pensions adequacy and retirement outcomes. The commission’s final report is due in 2027. The government outlines three broad issues to address:
- Adequacy: in real terms, future pensioners are expected to have a lower private pension income than those retiring today. In particular, this affects: lower and average earners; Generation X (those born between 1965 and 1979), whose employment fell largely after the decline of DB arrangements but before auto-enrolment; ethnic minority groups; young people; and the self-employed.
- Fairness: inequalities arise for reasons including gender, household make-up, age and life expectancy.
- Risk: the shift from DB to DC arrangements has moved the management of risk for providing an adequate retirement income from schemes/employers to individuals.
Alongside the commission, the government has also launched the most recent state pension age review (this is required by law at least every six years). This review will consider whether the rules around pensionable age are appropriate, using two independent reports on life expectancy and other relevant factors.
Read the policy paper on the Pensions Commission and documents relating to the third State Pension review.
TPR regulatory intervention report for master trust failings
In its first enforcement action against a master trust for reporting failures, the Pensions Regulator (TPR) has issued fines to the scheme funder and corporate trustee of a master trust in relation to member communications failures and breaches of the law.
Master trusts are subject to specific requirements to report significant events, as soon as they become aware of one occurring. Significant events include a failure of the systems and processes used in running the scheme which has a significant adverse effect on the security or quality of data or on service delivery. In addition, they are subject to the requirement to submit breach of law reports where there is reasonable cause to believe that a duty relevant to the administration of the scheme has not been complied with, and that failure is likely to be of material significance to TPR in the exercise of its regulatory functions.
The failures in this case stemmed from invalid or missing email addresses impacting the delivery of emails (including mandatory communications). There was a delay of more than a year in finding bounce-back notifications; an internal review was undertaken and a decision was made not to report the incident to TPR. Similar failures subsequently occurred and were investigated but not reported for three months. While TPR was investigating the second incident, a third failure to deliver statutory communications was discovered and was reported promptly as a breach of law (but not as a significant event). In total, over 81,000 communications were not sent.
Following warning notices, the matter was referred to the Determinations Panel and was ultimately settled on the basis that three separate failures to report significant events had occurred, as well as two failures to comply with the breach of law reporting requirements. The scheme funder and the trustee each received a GBP50,000 penalty.
While some aspects of the case are specific to master trusts, there are wider lessons for employers and trustees. TPR’s regulatory intervention report highlights the importance of communicating effectively with members: the Determinations Panel concluded that the communication failures (including auto-enrolment communications) had caused both financial and non-financial harm to members and potential members, by taking away members’ opportunities to make decisions about their pensions. TPR also underlines the need for robust systems and processes, and notes that administrative and governance failures could be symptoms of other issues.
Read the regulatory intervention report and the determination notice.
TPR blog post on improving data
TPR’s latest blog post highlights the importance of data quality as schemes prepare for pensions dashboards. TPR warns that a "data debt"—the build-up of data quality issues over time—could jeopardise compliance with dashboards duties. Trustees are urged to prioritise data cleansing and ensuring that accurate, digital, up-to-date information is ready ahead of connection deadlines. In addition to its normal scheme engagement activities, TPR will be undertaking targeted engagement on dashboards readiness with the largest UK schemes (those with more than 100,000 relevant members) in the coming months, with a specific focus on data. It will also engage with mediumsized schemes, focusing on dashboards duties more broadly rather than specifically on data quality.
Read the blog post.
PDP blog post and request for input on voluntary connection
The Pensions Dashboards Programme (PDP) has published a blog post discussing the option for schemes with fewer than 100 relevant members to connect to the pensions dashboards ecosystem. While these smaller schemes are not in scope of the mandatory connection requirements, they may choose to connect voluntarily. The blog post encourages voluntary connection but also sets out considerations that need to be taken into account, including resource implications, data readiness requirements, and ongoing obligations. The PDP is seeking input from the industry on the voluntary connection process.
Read the blog post.
