The chief executive of AJ Bell has warned that the government risks “fundamentally undermining” Britain’s pension system with its planned changes to inheritance tax.
Michael Summersgill issued the stark warning in a letter to the Chancellor over her proposed tax reforms , as reported by the Financial Times.
The head of the retail investment platform expressed serious concerns about the changes would subject inherited pensions to inheritance tax from 2027.
Currently, pension pots can be passed on tax-free to beneficiaries however this will change in less than three years time.
Summersgill described the government’s approach as “arguably the most complex and costly way of raising tax from unused pensions on death.”
The changes were confirmed in last month’s Budget, with inherited pensions set to become subject to inheritance tax starting from April 2027.
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The head of AJ Bell is issuing a warning about the pending changes to the tax system
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The Treasury estimates this move will generate significant revenue, expecting to raise nearly £1.5billion annually by 2030.
This marks a substantial shift from the current system, where pension pots can be transferred to beneficiaries without any tax implications.
The reform represents one of the most significant changes to pension inheritance rules in recent years.
According to Summersgill, higher-rate taxpayers would face a particularly heavy burden under the new rules.
He warned that beneficiaries could end up paying an effective tax rate of 64 per cent on inherited funds, as they would be subject to both inheritance and income tax.
The AJ Bell chief also highlighted concerns about potential delays in beneficiaries receiving their inheritance.
From April 2027, unused pension pots would need to go through probate before distribution.
“At what will be an emotionally challenging time for those close to the deceased… the process of distributing much-needed support will end up stalled in a much more complicated probate process,” Summersgill wrote in his letter.
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These administrative hurdles would add further complexity to an already difficult period for bereaved families.
Rather than implementing the proposed changes, Summersgill suggested an alternative approach to pension taxation.
He recommended closing a specific loophole that currently allows beneficiaries to avoid income tax on pension pots when the pensioner dies before age 75.
A Treasury spokesperson said: “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth.”