Baroness Ros Altmann, a former pensions minister, has warned of a “coming catastrophe” in the form of inheritance tax on unused pensions and has proposed a flat-rate levy on all unused pots instead, saying this could eventually fund social care insurance.  

“It’s not too late to avoid this disaster – I do hope the government will listen to reason,” the peer said.  

She was among a group of politicians and industry experts who provided evidence to the Finance Bill Sub-Committee on Monday, warning against putting the responsibility of finding, calculating and, where necessary, paying inheritance tax on pensions within six months, on personal representatives – often grieving family members.  

Altmann has now reiterated a suggestion she made on Monday, saying the government should “keep it simple with a flat-rate levy on unused pensions”.  

“The most straightforward way” to ensure pensions are not passed on tax-free on death would be a flat-rate levy on unused pensions, for example 10%, 15% or even 20%, she argued.  

This could be paid out of the pension fund by the pension provider and could be levied on all unused pensions, she argued, “regardless of the IHT position of the estate”. It would mean that people who inherit estates which fall below the tax-free thresholds would still see the amount that is passed on reduced if there are any unused pensions.  

She pointed to the simplicity of the solution: “No faffing about with IHT forms. No 8% interest on late payments. No incentive to take money out while still young, just in case. No headlines about widows or bereaved children bankrupted by the costs of trying to deal with pension tax consequences and beneficiary disputes involved in administering their loved one’s estate. More pension money available to stay invested for the long-term and still raise revenue for the Treasury.”  

The amounts raised could at some point be earmarked to help fund social care, Altmann proposed.  

“Ultimately, it is possible that the revenue from an inherited unused pension levy could form a national fund to pay for social care reforms over time,” she said. “This would be a really positive social outcome, that uses pension savings directly to help fund later life, which is in desperate need of reform.”  

Social care funding is a longstanding problem putting huge strain on local councils and which can be financially catastrophic for families. However, successive governments, including the current one, have avoided reform since former PM Theresa May had to U-turn on reform proposals in her 2017 election manifesto.  

Her manifesto proposed to align means-testing for care home-based care and care at home, meaning the families of people receiving care at home might have had to sell the family home at the end – this is currently only the case where someone needs residential care.   

The prospect of selling a home to finance at-home care proved unacceptable to voters, with the media labelling it a “dementia tax”.