Marvin OnumonuThe Investing and Saving Alliance (TISA) research found there are better ways to deal with pensions when someone dies, instead of putting them through inheritance tax (IHT).
TISA, working out the costs with Oxford Economics, looked at two options.
The first said that if a dependant gets the pension, they can only take it as taxable income over time.
If it goes to someone who is not a dependant, they must take all the money at once and pay income tax, but only if what is left is more than £90,000.
The second option is a flat rate tax on any unused pension over a set amount, with no exemption for spouses.
Each person who dies would have their own threshold.
These suggestions show the Government it can still get the tax money in other ways.
The aim is to make things simpler and help families get money faster after someone dies.
Anne Fairweather, head of government affairs & public policy at Hargreaves Lansdown, said: “The government’s proposed changes have caused confusion for people’s retirement strategies and will bring extra complexity to families at an already difficult time having lost a loved one.
“The challenges of such an approach include the issues of finding lost pensions, filing the right forms, and valuing assets all within a defined period.
“Delays in the process risk families, some of whom could be dependent on the deceased’s income, being left waiting for much needed money and potentially paying interest to HMRC.”
Fairweather added: “There’s also the added challenge that confusion around how the inheritance tax system works may lead to people making sub-optimal decisions that they may come to regret.
“People may think inheritance tax applies to all pensions for instance when it doesn’t and make decisions based on that mistaken assumption.
“It could also include gifting away too much money too early and leaving people struggling later on.”
She said: “This report shows that if the government is committed to tax reform of pensions on death, then there are easier ways to do it, and this should be used as a springboard for a wider discussion on the best way forward.
“Both options put forward will be easier to understand and administer than the government’s proposal but there is much detail that needs to be worked through and other options that need to be considered.
“One area for further exploration would be the position depending on whether pensions have been crystallised or uncrystallised on death to ensure fairness.
“Another would be the position regarding annuities which is yet to be clarified.”
She added: “With less than two years to go until the implementation of the proposed new regime it is vital that a debate takes place as to the best way forward to make sure grieving families do not face unnecessary barriers and complexity.”
