IHT changes: things to consider for SIPP and SSA providers and professional trustees

What are the implications of the proposed inheritance tax on unused pensions for SIPP and SSAS providers and professional trustees?

As expected, the Spring Statement had no new personal tax changes for the pensions industry. This is welcome relief for many following the 2024 Autumn Statement. However, from April 2027, unused pensions will generally be subject to inheritance tax (IHT) upon the pension holder's death. The aim is to ensure pensions are used for retirement income rather than passing on wealth.

Leaving policy to one side, there are a host of technical and practical challenges with the proposals in their original form. This is a very significant policy change with deep implications for financial advice and estate planning. Whilst HMRC considers that the average taxpayer will not be affected by the change as most estates won’t pay IHT even after the policy is enacted, for pension providers and investors there is a lot to consider.

SSASs and SIPPs

For providers of small self-administered schemes (“SSASs”) or self-invested personal pensions (“SIPPs”) the proposed changes are likely to be of particular relevance, with some technical issues causing headaches. SSAS and SIPP arrangements are commonly used by business owners (often of family-run businesses) and executive boards, the self-employed and / or those who are able to invest more into their pension savings than others. 

Higher earners: SIPP and SSAS savers are generally assumed to be weighted more towards higher earners and more financially “savvy”, If these assumptions are true then, by definition, the estates of SIPP and SSAS investors are more likely to be subject to IHT than the average pension saver. This will become even more likely once unused pensions form part of an estate for IHT purposes. 

Additional work: Regardless of whether there is any eventual IHT payable in relation to a person’s pension account, in all cases the proposed arrangements will require additional processes and correspondence, as well as potential liability for errors, for scheme administrators and providers. This may in turn impact on charges to consumers, and additional indemnities being required.

Accounting for and paying any IHT due on unused pensions is likely to be particularly complex for SIPP and SSAS schemes. The proposed process under HMRC’s technical consultation highlights the practical challenges to all schemes of paying IHT on pensions. As a starting point, IHT must be calculated and paid within 6 months of a person’s death. Within this timeframe, the pension scheme’s administrator (“PSA”) must share all relevant information of the member’s unused pension benefits and nominated beneficiaries with the deceased’s personal representatives (“PRs”), so that it can be factored into the overall value of the estate. If IHT is due, the PR must apportion an appropriate amount of IHT to the unused pension and notify the PSA of the amount of tax payable, so that the PSA can pay this to HMRC through the scheme’s usual accounting for tax process. The difference between the IHT timescale of 6 months and the pensions tax timescale of 2 years for discretionary payments is of particular concern within the industry.

This is complex enough if the scheme is managed on an arm’s length basis by a professional scheme administrator.  Imagine, then, managing this process in a SSAS without a professional trustee or scheme administrator, where all the trustees are also scheme members, and all of them part of the same family running their family-owned business. The trustees together will most likely be the PSA for statutory purposes, and therefore responsible for accounting for any tax payable by the scheme. The chances are that at least one of these trustee-members is also the deceased’s PR responsible for administering the estate as a whole. All of them may be grieving the loss of a family member or colleague.

Through all this, as well as the current requirements to calculate the value of the unused pension and agree who will become entitled to it, and in what form, they will also need to factor in the additional information gathering, timescales and payment of any tax due. 

Illiquid investments: an added layer of complexity for both SIPPs and SSASs can be the type of investments held by the scheme. Investments are commonly illiquid (such as real property and unlisted equities) and may be closely related to the members’ business (such as sale and leaseback arrangements). Valuing such assets and, where needed, disinvesting them to settle inheritance tax is likely to be an expensive, complicated and lengthy process, and may be disruptive to the operation of the business. Where unplanned sales result, market conditions may mean a loss of value, impacting other pension savers with interests in those assets.

Non-advised consumers: The FCA has recently expressed concerns about areas of poor practice in the SIPP market, with platforms falling short of the FCA’s Consumer Duty standards. This is not a minor issue: total assets under administration within SIPPs are now estimated to be £567bn for approximately 5.3m consumers and, despite their name, a significant percentage of SIPP members may not “self-invest” their savings in any meaningful way. Rather, there are concerns about savers leaving their investments untended, with a worrying percentage never receiving advice on where to place their assets, how much they need for a comfortable pension income, or how to draw on their savings when they reach retirement. 

It will be important for all in the industry, as well as Government, to ensure that the final policy outcome is clearly communicated and explained to those who don’t take financial advice, because their financial plans may need to change. The ongoing work in relation to the advice guidance boundary should take this into account.

HMRC’s consultation 

HMRC acknowledges that the proposed process “will require information to be shared between PSAs, PRs and HMRC in a timely manner” and that “there will be certain scenarios which do not fit neatly into the process” anticipated. SIPPs and SSASs are likely to present such scenarios. Following comprehensive feedback from the industry (including AMPS, which represents much of this part of the market), HMRC will now be considering whether any updates to its proposals should be made - the industry awaits the outcome with interest. 

In the meantime, action points for pension providers and professional trustees are:

• Consider what to say to consumers, when, and how. Particular thought needs to be given to vulnerable consumers.
• Consider whether to make changes to scheme death benefit options and terms, in preparation for this change.
• Monitor developments

Burges Salmon has a unique combination of pensions, regulatory and private wealth expertise. If you wish to discuss this policy area, please do contact us.

This piece was written with assistance from Amy Davies