Much speculation had been doing the rounds in the run up to today’s budget statement from Chancellor Rachel Reeves. As a result, advisers across the country have been bracing themselves in readiness to find out whether there would be changes to pension legislation announced as part of the package and, if so, exactly what they were.
So now we know! In her budget speech today Reeves announced a number of changes to pensions legislation – including a commitment to maintaining the triple lock for the state pension.
Pension and retirement experts from across the financial services spectrum have been sharing their reaction to the budget news relating to pensions as follows:
According to Steve Webb, partner at pension consultants LCP, the national insurance hit on employers is not only a major setback but …” Terrible news for hopes of action to tackle Britain’s pension undersaving crisis. Even the Government accepts that millions of people are not saving enough for a decent retirement, and there is no doubt that part of the answer is workers and their employers contributing more. But with employers already having to absorb a big increase in payroll costs, it seems highly unlikely that the Government will try to ‘double dip’ and ask employers to pay more for pensions any time soon. Even the modest improvements to automatic enrolment for which legislation has already been passed are at risk of being stuck in the slow lane. This is a worrying day for anyone who cares about the adequacy of pension saving in the UK”.
Steven Cameron, Pensions Director at Aegon, said:
“The Chancellor has used her Budget speech to confirm that the state pension will be increased by 4.1% next April, in line with the Triple Lock. This is more than double the 1.7% inflation figure announced earlier this month.
“The 4.1% increase is based on the Triple Lock formula, under which pensions increase each April by the highest of three measures – earnings growth (the year-on-year rise in average earnings for the period May to July), price inflation (for the year to September, announced as 1.7% earlier this month), or a minimum of 2.5%. For someone on the full new state pension of £221.20 per week, this would equate to an increase of £9.10 to £230.30 per week, or £11,975.60 a year.
“For those who reached state pension age before 6 April 2016 and who are on the full basic state pension, the increase would be around £6.95, bringing them to £176.45 per week, or £9,175.40 a year. A little-known rule is that any earnings-related element of the basic State Pension, relating to the pre-April 2016 rules, and top ups, are only increased in line with the rate of inflation and not the Triple Lock. Therefore, some may find their overall state pension increase lags behind the 4.1% figure.”
Jamie Jenkins, Director of Policy, Royal London said:
“While most people will still benefit from their estate falling under the limits for Inheritance Tax, many people will have planned their retirement with a different understanding of how their wealth would be taxed and may have started taking income on this basis.
“Many advisers will now need to contact their clients and may need to rethink their approach to estate planning and income withdrawals. Helpfully, the changes don’t take effect until April 2027.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said:
“Pensioners across the country will be relieved to see no state pension shocks in the Budget as the Chancellor confirms that the state pension will rise by 4.1% to match the average earnings element of the triple lock. This means that next year’s full new state pension is set to reach £11,975.60 annually, an increase of £473.
“This will come as welcome news to many, however there are possible tax implications for pensioners. The Personal Allowance, which is the amount of income received before paying tax, has been frozen since at £12,570 since 2021/2022 and currently remains fixed in for quite a few years to come. This means that the full new state pension payment has grown from 70% of the allowance in 2019/20 to a likely 95% next year, leaving pensioners with only £594.40 of headroom before they begin paying income tax.”
Hannah English, Head of DC Corporate, Hymans Robertson says:
“The increase in National Insurance Contributions (NICS) for employers from 13.8% to 15% announced in the Budget today, is likely to dramatically/substantially increase the costs for employers. While the perception that the recent reductions in DB scheme funding costs have created more than enough breathing space for extra national insurance contributions for UK corporates on their wage bills. We are concerned the opposite is true. Stacking another cost on the pay and benefits for every UK corporate may drive behaviours that yet again can harm today’s ‘working people’ in their DC pension schemes.
“Corporates may choose to stop sharing employer NI savings on salary sacrificed pension contributions. For an employee on a £32k salary making 5% contributions into their pension via salary sacrifice, the employee may currently benefit form an additional £221 per year by way of the valuable sharing of all NI savings. If employers decide to no longer share these savings this could have a long-term impact on the outcomes of today’s savers.
“The change announced by the Chancellor may be the final straw for those employers that have upheld their generous pension contributions despite difficult economic conditions. In this case, such scheme contribution structures may be increasingly get overhauled.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group, said:
“It’s perhaps no surprise that the Government has decided to bring pensions into scope for inheritance tax as their exemption was little-known to the public. However, pensions have been seen as useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules.
“Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way. This represents a fundamental shift to how wealthier individuals think about accessing their money in retirement. At present it makes more sense to access ISAs and other forms of saving before touching pensions. In time we’re likely to see more pensions, accessed earlier to prevent them from becoming part of people’s IHT bill at a later date.
“The end result of this change is that many more people will now be brought into scope for IHT. While there could be some benefit to the Treasury, pensions are a long-term investment and it’s vital that large-scale changes to how they are taxed are well managed to avoid any risk of undermining confidence in pensions and scaring people from engaging with their retirement savings. Carefully thought through implementation and clarity will be key, perhaps most prominently in the case of unmarried partners who could be at a disadvantage.
“This is because the IHT spousal exemption means married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die, however benefits paid to an unmarried partner can face IHT charges. Now pensions are set to fall into scope for IHT, surviving unmarried partners could end up with less income and therefore a lower standard of living in retirement.”
Claire Trott, Divisional Director, Retirement and Holistic Planning, St. James’s Place, said:
“The Chancellor’s decision to include pensions in the IHT calculations, alongside freezing to the allowances, will likely increase the number of estates that will pay IHT significantly above the current 6%. The devil will be in the detail to determine if this includes only lump sums, or if it also includes benefits passed down by way of an income.
“In addition, we need to know how this will work for defined benefit pension schemes, if included, where individuals have no access to increased income to pay a charge. The delay in implementation of this change is welcome, allowing these questions to be resolved and giving individuals some time to plan.”
Lily Megson, Policy Director at My Pension Expert, said:
“Even though drastic pension tax changes didn’t materialise in today’s Budget, the damage has already been done. Weeks of speculation and rumoured sweeping reforms left savers anxious, causing many to rethink carefully planned retirement strategies. For those already wrestling with financial difficulties, this added uncertainty will have only deepened concerns about their future security.
“A confirmation of their already-pledged commitment to the triple lock and an increase in pension credit are welcome, if underwhelming. But it is not enough. The government now has an opportunity to rebuild that trust by focusing on initiatives that genuinely support savers. Finally prioritising comprehensive financial education and tools like the long-delayed pension dashboard will empower people to make informed decisions and feel confident in their retirement planning. What’s more, the second half of their pension review must deliver more than just lip service – savers need real, actionable reforms that encourage greater contributions and improve outcomes for retirement planning across the board.
“A nod to either of these engagement-boosting policies would have been a welcome announcement that could have alleviated some of the pension tax raiding fears. It’s now crucial that the Chancellor recognises the importance of stability and clarity in pension policy. Restoring confidence among savers will require transparent, considered policies that support long-term financial wellbeing, rather than fuelling rampant speculation that only undermines it.”
Steve Hitchiner, Chair of the Society of Pension Professionals Tax Group, said:
“The Chancellor’s announcement about pensions being subjected to Inheritance Tax (IHT) is not entirely unexpected, indeed the SPP highlighted this possibility in its Pensions Tax report earlier this month. At present, a lump sum can be paid to an individual’s beneficiaries tax-free, up to £1,073,100. This is anomalous to the payment of a dependant’s pension, which is usually taxed as income.
“Pensions were never intended as vehicles for Inheritance Tax planning, so overall this makes sense, and is a more attractive solution for raising revenue than many of the speculated alternatives such as reforming pensions tax relief or imposing NICs on employer pension contributions. However, it will be important to see the detail and how this will interact with the practicalities of different pension arrangements.”
Gary Smith, Financial Planning Partner and retirement specialist at wealth management firm Evelyn Partners, said:
“Pensions have been one of the most tax-efficient investments available to savers, with tax relief on personal contributions, tax-free growth and pension funds remaining outside of your estate for IHT on death. That means some retirees have prioritised using other savings and assets to fund retirement before their pensions.
“More detail are to follow, but the Chancellor has removed the IHT-free status of defined contribution pensions from April 2027, which will mean that the proportion of estates subject to IHT will grow from the current 6%. Retirees and savers have 18 months to review their long-term plans. As defined contribution pension funds could now be subject to up to 40% IHT on death, we will probably see greater withdrawals from pension pots.
“Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%. It’s arguable that this consolidates the two tiers of the UK pension system, as the change removes one of the few advantages that defined contribution pensions had over the gold-plated final salary schemes that now exist largely just in the public sector. DC pot holders could leave their savings to beneficiaries tax-efficiently, while the death benefits for members of public sector or defined benefit pension arrangements vary between schemes, but usually entail an income paid to dependents.
“There seems to be a willingness in Whitehall to allow the gap between private and public sector pension arrangements to widen.”
Malcolm Reynolds, Aptia’s UK President, said:
“Perhaps the most significant moment in the Chancellor’s Budget from a pensions perspective was the decision to move inherited pensions into inheritance tax from 2027, which is ultimately a public acknowledgement that pensions are exactly what they are – a wage in retirement and not a tool for estate planning. There is a sense that earlier this year the Chancellor may have had pensions in her cross hairs but she has clearly listened to industry and not made knee-jerk changes, which is encouraging.”
Director of Policy and External Affairs at the PMI, Tim Middleton, said:
“There had been extensive speculation in the national press that Rachel Reeves would make a series of drastic reforms, such as changes to the tax-exempt status of the Pension Commencement Lump Sum (PCLS). It was also expected that Employer National Insurance Contributions (NICs) were to be charged on employer contributions to registered pension schemes. We are both relieved and delighted that even in such difficult economic circumstances the importance of our workplace pension system has been recognised and respected.”
“The only significant change announced today was to make inherited pensions subject to Inheritance Tax (IHT). Middleton added: “This change will only affect a small number of people. In all honesty, the tax-exempt status of inherited pensions was always politically difficult to defend.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said:
“The ability to take 25% of a pension pot tax free is one of the most loved and best understood features of the UK pensions system and has been spared any change. Ahead of the Budget there was a rush of savers looking to access their cash to avoid a possible cut in the allowance. For those who did so, the question now is what to do with this money. For those with no immediate need to use it, finding a home for the money where it will at the very least keep pace with inflation or offer some potential for growth is important.
“When it comes to their pension itself, people should be aware that any further withdrawals will be taxed at their marginal tax rate and that future contributions into their pension will be subject to the Money Purchase Annual Allowance if they make withdrawals beyond their tax free cash, which reduces the amount they are able to pay into their pension to £10,000 a year. This is a reasonable sum but those looking to make significant pension contributions over the coming years should look carefully at the rules at accessing any further pension savings and ideally speak to their pension provider or a financial adviser about their plans.
“There is an argument that lowering the tax free cash cap to a figure like £100,000 could stand up as a progressive policy as the vast majority of pension savers would have seen no change. However, there would have been a number of difficult considerations particularly around how to treat people who had already built up a significant pot. Retrospectively changing the rules for them seems unfair as they will have planned for retirement and perhaps prepared for major financial goals like paying off their mortgage based on the tax free element, so presumably a level of transitional protection would have to be put in place. At the same time, applying a lower cap only to new contributions seems to risk amplifying generational inequality and potentially seeding pension scepticism in younger generations.
“Ultimately, leaving the current highly valued system in place seems a sensible decision.”
Steven Cameron, Pensions Director at Aegon, comments on the decision not to change tax-free lump sums, said:
“Those who’ve built up substantial pension pots will be relieved that the Chancellor didn’t introduce new limits on tax-free lump sums. Currently, individuals can typically take 25% of their pension pot at retirement as a tax-free lump sum, subject to a recently introduced maximum of £268,275. There was speculation that the Budget could include new limits, such as capping the tax-free lump sum at a much lower level, perhaps £100,000.
“Many individuals will have planned their retirement finances on the assumption they could take 25% on their full fund as a tax-free lump sum. Being stopped from doing so would have caused a major outcry. When saving in a pension, your funds can’t be accessed until age 55, increasing to 57 in 2028. People deserve tax incentives in return for putting away money today to provide for a retirement which could be decades away. Restricting a much-loved tax perk might have made pension savings look less attractive at a time when many – if not most – people are not saving enough for a comfortable retirement.”
“Unfortunately, because of the intense speculation that the Chancellor was planning to restrict tax free cash, some individuals decided they couldn’t afford to risk losing out and accessed their tax free cash earlier than they would otherwise have planned, even while still working. This has now proven not to have been necessary but can’t be ‘unwound’.
“To regain some of the tax perks, individuals should consider investing some of the tax free lump sum in an ISA, subject to the £20,000 annual allowances. In addition, people can also usually continue to pay in up to £10,000 a year into their pension.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said:
“Changes to pension tax relief were a potentially powerful tool in the Chancellor’s revenue-raising kit however it seems the challenges and complexities proved too great for this Budget. Firstly, they would have been highly complex to implement and secondly they came with political downsides given their knock on implications for public sector workers in particular. As we have now seen, there are other aspects of the system which pose fewer logistical issues and perhaps come with fewer strings attached.
“There is a possibility that the government will revisit the question of tax relief alongside pensions issues in the round in the adequacy section of their upcoming Pensions Review. Tax relief is however a key tenant of the current pension system and any future discussion needs to ensure there are adequate incentives for people across the earnings spectrum to give up income today for greater security in retirement.”
Tom McPhail, Director of public affairs at the lang cat has said:
“The imposition of IHT on pensions comes as no surprise. For many people, their pension is their biggest asset after their houses, so this is no small thing. This change from 2027 will equalise the IHT treatment of assets across pension and non-pension savings. The government is forecasting £1.46 billion in revenue from this measure, by 2029/30.
“This is likely to lead to a shift in behaviour, with wealthier investors looking to draw more of their income from pensions, rather than using those pensions as an IHT planning vehicle. At present some savers are choosing to draw their retirement income from other sources such as ISAs, in the knowledge that these non-pension savings are subject to IHT. This change may also lead to more savers choosing to buy annuities, rather than keeping money in drawdown plans purely for IHT planning purposes. Some savers favour drawdown specifically for the death benefits they offer and this will now be diminished from 2027; at the margins it is likely to lead some savers to look more favourably at the higher, guaranteed income on offer from annuities, particularly as Gilt yields appear to be rising in response to the Budget.
“Given many people transferred out of their Defined Benefit pension scheme specifically for the death benefits available through a defined contribution pension, some of these savers are going to be disappointed by this news. The increase in employer NI makes the use of salary sacrifice for pension funding look even more attractive than it did before. There seems no logical reason for all employers not to use this as a way of reducing the NI paid to the government.
“There will be widespread relief that Tax Free Cash has not been cut. Hopefully this now means a period of stability for pension savers, with no further tax changes in pensions for the remainder of this parliament.”
Claire Carey, Partner, Sackers, said:
“Grappling with an apparently large hole in Treasury coffers, the first female Chancellor, Rachel Reeves, delivered the Budget earlier today. With Labour having committed in its Manifesto not to ‘increase taxes on working people’, the Chancellor announced that wealth inherited through pensions will be brought under the inheritance tax banner from April 2027.”
“Following widespread speculation that pensions would once again fall under the Government’s microscope, today’s announcement wasn’t unexpected. But the widespread scope of the proposals may take many by surprise. The ‘unspent pensions pots’ being targeted by the inheritance tax proposals currently include both DB lump sum death benefits and DC benefits being paid as income to a dependant through an annuity or a drawdown facility.”
Mary Cahani, Head of Defined Contribution (DC) Client Engagement at Invesco, said:
“We welcome the fact the Chancellor has heeded advice not to introduce significant tax changes to pensions in the Budget. Pension savers need long-term certainty to be able to plan ahead with confidence.
“However, as we’ve seen in recent weeks, even speculation about tax changes can drive people to make decisions that could have a significant impact on their quality of life in retirement. Therefore, it’s disappointing the Chancellor did not take the opportunity to set out a pensions tax roadmap for the rest of the Parliament. If further tax rises are needed in future budgets, we will inevitably see further unhelpful speculation about pensions taxation. All eyes will now be on the forthcoming pension review, which should clarify the government’s intensions on consolidation and asset allocation.”
Madeleine Dowling, technical team lead at Wesleyan Financial Services, said:
“The government wants a fairer tax system and for inheritance to be applied consistently across similar products such as pensions and savings. They also want to encourage people to use their pension tax relief for retirement as it was initially intended for and not as capital to be passed on. The NHS is currently included in the estate in the event of death and the TPS and Personal Pensions will be treated in the same way from April 2027.
“This doesn’t mean pensions are no longer tax efficient investments, but clients may look differently at how they take them at retirement. Rather than moving funds into income drawdown so they can be inherited by their dependants for example, they now may choose to take them and reinvest the money in a more IHT friendly investment such as an investment held in trust.
“It has made IHT and retirement planning slightly more complicated as there will need to be a comparison between the IHT liability of leaving the funds in a pension compared to the tax incurred for withdrawing the funds.”
Ian Bell, National Head of Pensions and Partner at RSM UK, said:
“Whilst the pensions industry may breathe a sigh of relief that the Chancellor has left it largely untouched in the Budget, it does beg the question on what wriggle room may be left to improve the savings culture in the UK during the remainder of this parliament. Was this a missed opportunity to build on the Mansion House Reforms and encourage wider pensions saving that could be put to good use in UK investments?
“If there are any recommendations to increase auto enrolment rates and pension savings incentives in the forthcoming Pensions Bill, can the Chancellor pile more pressure on employers to deliver on top of the dramatic increase in employer’s National Insurance contributions (NICs) that she has announced today? Many CFOs across the UK will now be working on a strategy to restrict that additional NIC burden as far as possible, with likely impacts on employee numbers, forthcoming salary reviews and pension contributions. The knock-on impact of pension savings will ultimately follow in years to come.”
