Several voices in the pensions industry have criticised a solution from the government-backed workplace pension scheme National Employment Savings Trust (Nest) to solve its inheritance tax problem.
Currently the pension scheme - the largest in the UK, with 6m members - is the only one where trustees do not have full discretion when deciding who should receive a lump sum death benefit from a member’s pension arrangement.
Tax rules mean that when trustees don’t have this discretion the value of the lump sum will be counted as part of the deceased’s estate for IHT purposes on their death.
The current rule can become a problem if the individual transfers into Nest all of their pension pots to consolidate them, which has been allowed since April last year.
Any Nest member who is not under trustee discretion will lose 40 per cent of their pension pot if their estate is above the IHT nil rate band of £325,000.
Nest’s solution to this issue – the target of a consultation that closed on 29 December – is an opt-in solution, due to cost restrictions.
Members who wish to have trustees’ full discretion will have to complete a wish form, which will address the IHT issue that some individuals may otherwise encounter, Nest said.
Requiring members to opt in to discretion, rather than applying it across the board as a default, means that Nest won’t need to introduce “an expensive, administratively complex system”, it said.
But in his response to the consultation, rival Salvus Master Trust said that it doesn’t support this opt-in approach.
Managing director Graham Peacock said: “Members of all workplace pension arrangements must be protected as far as possible from unnecessary charges including taxation.
“We see that Nest is going to some lengths to avoid having to apply trustee discretion to all members. Nest appears to be turning common practice on its head and putting the costs of delivering an IHT product ahead of ensuring good member outcomes.”
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, agreed the Nest solution is not the best way forward.
He said: “Many employers don't even fully understand what can and can't be done with their auto-enrolment schemes, so expecting them to raise this as an issue for their employees seems counter-intuitive.
“Nest have a very valuable role in the market but the more clients they get, the more will be unwittingly affected.
“It doesn't matter if the amounts involved are large or small, an unexpected 40 per cent tax charge will come as a nasty shock.”
Mr Peacock also argued that if “Nest is not able to deliver discretion for all members without increasing its charges, then it should increase its charge”.
He said: “The potential down side to any single member whose estate faces and IHT charge as a consequence is significant.”
Rival provider Now Pensions also responded to Nest’s consultation.