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Pension advisers and wealth management chiefs are urging the Treasury to rethink plans for how inheritance tax will be applied to pension funds, warning that the current proposals could ‘g lead to serious delays and increased costs for the deceased, even in cases where there is no inheritance tax.

In his Budget last autumn, chancellor Rachel Reeves announced that pension funds will become part of inherited estates in April 2027, a move set to disrupt the tax planning of wealthy people but raise £1.5bn a year for the Treasury by 2030 .

The government estimates its proposals will bring around 1.5 per cent more estates within the scope of death duties by 2027-28, on top of the 4 per cent already above the £325,000 nil-rate band, which could rise to £500,00. where a property is passed.

But concerns have been raised by tax and pensions professionals about the potentially damaging effects of consultations on the technical details of the government’s proposals which close on Wednesday.

The Society Of Pension Professionals, a trade association, has warned the government’s plans “impose unrealistic and impractical timescales” while applying interest charges or penalties to pension scheme managers for delays “over which they have little or no control”.

The chief executives of some of the UK’s biggest wealth managers, including Interactive Investor, Quilter and AJ Bell, have also written to the chancellor about the “wrong and potentially damaging” proposals, calling on the government to “work with the pension industry to agree. a simpler way to achieve the policy objective”.

The letter, seen by the Financial Times, said: “The complexity of the proposed approach, which is to bring all pensions in estates for IHT, will lead to significant delays in the payment of money to beneficiaries in death and cause misery to the bereaved families.”

Under the proposals, personal representatives of inherited pension funds will be responsible for identifying the funds and calculating how much if any IHT is owed, taking into account the estate’s other assets. The administrator of the pension scheme is then responsible for paying inheritance tax before the funds are released.

Experts say that this may cause delays in payments, including to those who are not liable for taxes. Under current rules, inherited pensions can be paid more quickly to beneficiaries and can be used to pay probate costs, funeral charges and other urgent bills.

“The (new) process is complicated and it will penalize lower incomes,” said Anna Rogers, senior partner at Arc Pensions Law. “Rich people don’t need money right away . . . it seems the harm may be disproportionate to those who are not rich and those who die young.”

Lawyers are also concerned that the six-month window between death and the inheritance tax payment deadline will not leave enough time to identify pension funds and calculate the tax, leaving individuals vulnerable to those late payment fee.

“Pension scheme rules allow two years for payment of death benefits . . . there may be a need to sell assets to pay the tax, but there are cases of people not being able to pay, for example when a property needs to be sold,” said Jeremy Harris, partner at Fieldfisher.

The SPP is urging the government to leave the calculation and payment of IHT to the personal pension representative and HM Revenue & Customs – or for the benefit to be taxed at the full 40 per cent and paid immediately by the scheme administrator in the minority of cases where the a pension is subject to IHT.

Steve Hitchiner, chair of the SPP, said the issues relating to the reporting and payment of inheritance tax on pensions were “very important” and the current proposals “would result in many problems and challenges that could have been largely avoided “.

Some death benefits in the service, designed to provide financial security for a person’s dependents if they die unexpectedly young, can also face a hefty bill. inheritance tax, in cases where they are set up as part of a registered pension scheme.

“This has the potential to be a mess . . . at some point there was going to be a backlash,” Harris said.

Kate Smith, head of public affairs at Aegon, added that there was a lack of clarity on what was covered and that “nobody thought (the proposals) would work”.

The Treasury said: “We continue to encourage pension savings for their intended purpose of funding retirement rather than being used openly as a vehicle for transferring wealth.”