The inheritance tax raid on pensions is 'fundamentally flawed' and unfair on grieving families, say lawyers and money experts.

People will be put off from acting as executors to wills due to the fallout for bereaved relatives, which could include delays sorting out estates and legal risks, they warn.

Unspent pensions will become liable for inheritance tax - along with savings, property, investments and other assets - from spring 2027.

Sorting out estates is set to become far more onerous because families will have to chase up pension companies for vital information.

Stiff interest payments, currently set at 7.75 per cent, could be levied if they fail to track down all pensions, as well as other assets, and work out and settle the bill within six months.

'These changes significantly increase the burden on executors who are navigating the loss of a loved one,' says Emily Deane, technical counsel at Step, the body of inheritance professionals.

'At what is already a difficult time, individuals may be expected to track down multiple pension arrangements, engage with providers before probate, and deal with complex and evolving tax requirements.

'What is needed is a fair system that works for all parties involved, and without simplifications, there is a real risk of delays, higher costs and growing reluctance to take on the executor role.'

Step says the Government has responded to some concerns via changes announced by HMRC last month, but has called for it to go further.

The organisation says executors and administrators of wills - known as personal representatives - could be exposed to tax liabilities on assets they do not control.

Step also warns of cash flow and recovery difficulties in estates liable for inheritance tax on pensions.

'Without a fully workable direct payment process, the burden of paying IHT on pensions will initially fall on the deceased's free estate,' it says.

'Recovering this tax from pension beneficiaries could prove incredibly difficult or uneconomical, especially if beneficiaries are unknown, located overseas, or uncooperative.'

Step says to improve clarity and fairness, inheritance tax should be calculated and paid directly from a pension fund, rather than making personal representatives responsible for managing the tax for each individual pension beneficiary.

'Calculating the tax at the fund level prevents the unfair scenario where personal representatives must drain estate funds to pay the tax, only to abandon recovery attempts if the pension beneficiaries are uncooperative, located overseas, or the recovery costs simply outweigh the tax owed.'

It proposes extending an existing 'direct payment scheme' to cover pensions, so pension funds can be instructed to pay inheritance tax directly to HMRC.

'This change would allow the tax to be paid from the pension within the six-month period after death, avoiding the automatic accrual of interest that HMRC's proposed system would trigger,' Step said. 

It also wants safeguards against estate and pension beneficiaries being financially penalised by administrative delays on the part of pension funds.

Under rule changes announced last month, people in charge of winding up estates will be allowed to stop pension firms paying out pensions in full if they think 40 per cent death duties might be due.

The new power to withhold 50 per cent of pensions will last for up to 15 months after someone dies.

But the Government has refused to extend the six-month inheritance tax deadline despite the extra hassle executors of wills or administrators are likely to experience when winding up estates involving pensions.

These personal representatives are usually a family member or friend, but sometimes a paid professional like a lawyer.

After a death, executors and administrators can also appoint professionals to help them if matters get complicated, with the fees coming out of the estate.

An HMRC spokesperson says: 'We’ve already taken steps to simplify the process, and we’ll continue to work with industry ahead of the changes taking effect. We’ll also be publishing further guidance and tools to help people get their tax right.

'More than 90 per cent of estates will continue to pay no inheritance tax after these and other changes.'

Rachel Vahey, head of public policy at investment firm AJ Bell, says personal representatives will face a huge administrative burden due to the inclusion of unused pensions in inheritance tax calculations.

She has compiled the following guide which identifies the five key 'pressure points'.

1. Telling the scheme someone has died

This means first tracking down all the pension schemes the deceased was a member of, writes Vahey.

Whilst that sounds straightforward, in the world of automatic enrolment it’s easy to become a member of a pension scheme when joining a new employer but then lose track of the pension when leaving that job.

Once they have identified the correct pension schemes, personal representatives will need to prove both their identity and their authority to act on the member’s behalf.

2. Valuing the pensions

The first job is to ask the pension scheme to give a valuation of the pension account – the ‘notional pension property’ – as at the date of death.

Pension schemes are allowed to give an estimate if it is difficult to get a valuation. The pension scheme has 28 days to reply with this information.

3. Working out if any IHT is due

If you leave your unused pension to anyone other than a spouse, civil partner or charity, they are treated as a ‘non-exempt beneficiary’.

In that case, any unused nil rate band can reduce the amount liable for IHT. Most people start off with a nil rate band of £325,000, and some may also have a residence nil rate band of £175,000 if they leave a home to a direct descendant.

You also inherit any unused allowance from your spouse or civil partner if they die before you. Any unused nil rate bands are apportioned across the estate and each pension scheme.

4. Asking schemes to withhold pension money

Most pension schemes decide who will inherit any unused pensions and then pay that money to them. They may make this decision before the personal representative has worked out what IHT is due.

'If the personal representatives are worried that it will be difficult to reclaim any IHT due on the pension money, they can ask the pension scheme to put a hold on up to 50 per cent of a beneficiary’s funds.

Any funds being paid to a spouse, civil partner or charity will not be withheld.

5. Paying IHT

There are three ways to pay any IHT due on a pension:

- The personal representative can pay the IHT due from the wider assets held in the estate;

- The beneficiary of the unused pension can pay the IHT from their own pocket

- Either the personal representative or the beneficiary may be able to ask the pension scheme to pay the IHT to HMRC before the unused pension funds are paid to the beneficiary.

The pension scheme has 35 days to pay the tax due. If the 35 days elapse and the IHT is still outstanding, then the pension scheme and the personal representative are jointly liable for the IHT due.

Once the IHT has been paid, the pension scheme can release any money they were withholding.