Proposed pension reforms included in next week’s Budget will create chaos and put bereaved families and ordinary people at financial risk, according to STEP, the global professional body for trust and estate practitioners.

It said plans to tax unused defined contribution pension funds risk delay and unfairness in the administration of even quite simple estates, at a time when people are dealing with bereavement.

Under pension reforms proposed by the government in July and due to come into force in April 2027, personal representatives (PRs), those legally responsible for gathering in the assets of estates and distributing to beneficiaries, would be held liable for inheritance tax on pension funds they do not control.

STEP said it is an unwanted and unexpected change to the proposals in the original consultation in 2024 which, if it goes ahead, has the capacity to result in great unfairness.

It warned that if the Finance Bill isn’t amended, families will be left struggling to find anyone willing to act as executor. If a professional does act as executor they will not want to distribute the estate for years in case new pension assets come to light on which they are personally liable to pay IHT. The change will drive up professional indemnity insurance costs for advisors and therefore clients.

It said estates could be left undistributed for years as executors wait for valuations, pension fund details and HMRC decisions. That will leave spouses, partners and children without access to funds from the estate (eg, the deceased’s bank accounts). People will already be subject to 8% interest from HMRC on any unpaid inheritance tax six months from death.

Emma Chamberlain, spokesperson for STEP, said: “STEP, alongside other industry bodies, has serious concerns about how the proposals to charge inheritance tax on pensions are designed. There is no reason why the executors should have to pay IHT due on the pension fund from assets of the estate, such as the house or bank accounts, which may well pass to completely different people. If they have distributed the estate before the pension fund IHT liabilities have been settled, they are personally liable.”

STEP has proposed recommendations and safeguards to help reduce risks if the government’s proposed changes come into effect. They include giving executors proper protection so that if a new pension fund emerges long after the estate has been distributed they are not personally liable. Unless it is clear the pension fund passes to an exempt beneficiary such as a spouse or charity, the pension scheme administrators should also be required to keep 50% of the pension fund until directed otherwise by executors so that it can be used, if required, to pay IHT.