Navigating the Complexities of Inherited Pension Tax Documentation: Tips to Evade Penalties
Preparing for Upcoming Changes to UK Inheritance Tax on Unused Pensions
Starting from 6 April 2027, most unused pension funds and death benefits (with certain exceptions like death in service benefits) will fall under the scope of Inheritance Tax (IHT). To help minimise administrative burdens for your loved ones acting as executors, it's crucial to take some proactive steps.
Organise Your Pension Details
Firstly, it's essential to keep thorough records and paperwork of all your pension schemes. This will assist executors in identifying which pensions you have, including policy numbers, making it easier to locate and report on them for IHT purposes.
Create a Clear, Consolidated Document
A second important step is to create a clear, consolidated pension identification document or summary. This should include details of all your pension schemes and other financial affairs. Templates such as Royal London's "When I’m Gone" can help organise this information, making it easily accessible to your executors.
Establish a Financial Power of Attorney
Thirdly, consider establishing a financial power of attorney. This legal authority can enable trusted individuals to deal with your pension providers and financial institutions promptly after your death, before probate, easing the administrative process for executors.
Government Support and Tools
HMRC has promised various online tools and calculators to help executors gather and analyse the necessary information. Additionally, HMRC will provide information and guidance for executors about the steps they will need to take regarding the new pension and inheritance tax regime.
Locating Pensions
If there's no paperwork, looking for one-off withdrawals or regular direct debits to pension providers in bank statements can help identify defined contribution pensions. If the deceased had a financial adviser, contacting them can help in locating all pensions as they should have a full picture.
Importance of Planning
By preparing in advance, you can greatly reduce the "admin nightmare" executors might face, as they will have to identify, report, and pay IHT on your unused pension funds alongside other estate assets. Proper documentation and legal planning now will help ensure your loved ones manage the estate efficiently and avoid potential penalties.
Addressing Concerns
Rachel Vahey, head of public policy at AJ Bell, has expressed concerns about the administrative burden on bereaved families. However, taking the steps outlined above can help alleviate some of these concerns, making the process smoother for everyone involved.
Steve Webb, former pension minister, offers three tips to avoid an inheritance tax pension paperwork headache: keep records, inform your executors, and consider a power of attorney.
The 'When I'm Gone' Document
Royal London offers a template document called 'When I'm Gone' that allows people to provide useful information about their financial affairs, including pension schemes, to their executors and heirs. This document can also be used to provide information about funeral wishes, the location of the will, and other important details.
Meeting the Deadline
It's important to note that the government requires the settlement of any inheritance tax bill within six months. Missing the deadline results in penalties ranging from £100 to £3,200.
In summary, focus on organising pension details, producing a clear information document, and securing financial power of attorney to ease administration for executors in light of the 2027 changes to pension inheritance tax.
- To help minimise the potential inheritance tax on personal-finance matters, consider creating a consolidated pension identification document or summary, known as the 'When I’m Gone' document, provided by Royal London, to make it easier for your executors to locate and report your pension schemes.
- To ensure that your personal-finance affairs, including pensions and savings, are handled efficiently after your death, consider establishing a financial power of attorney, granting trusted individuals the legal authority to deal promptly with pension providers and financial institutions.
- To prevent a potential inheritance tax paperwork headache, follow the advice of Steve Webb, former pension minister, and keep comprehensive records of your financial affairs, inform your executors about your pension schemes, and consider appointing a financial power of attorney.
