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The Autumn Budget may not have delivered a pensions revolution, but it did include several changes that could affect your retirement income, tax bills and what you leave to your family.
Here are three key pension changes announced by the Chancellor, and three important things that remain unchanged for now.
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1) Pensioners on lowest incomes will be protected from income tax
The Chancellor John Healey pledged that pensioners with income up to the value of the full new state pension will not pay income tax in this Parliament.
This is important because the State Pension will increase by 3.9% next April to £13,036 a year, overtaking the frozen £12,570 Personal Allowance. The Personal Allowance is the amount of income each of use can receive a year without having to pay tax on it.
Patrick Thomson, head of research analysis and policy at Standard Life Centre for the Future of Retirement, said: “Those with total income between £12,570 and £13,037 will receive the full Pensions Tax Allowance, worth up to £94 in the first year, while it will then taper away at £1 for every £3 of additional income, meaning some support available up to an income of £13,319.
“This avoids a cliff edge, and the automatic application should make the process easier for people in this income bracket. The policy has been estimated to cost £45m in the first year which is small scale in the scheme of government finances but will be tangible benefit for those affected.
“However, with the State Pension continuing to rise against a frozen Personal Allowance, even relatively small differences in retirement income could lead to different tax outcomes, adding another layer of complexity to the system.”
One drawback of the new allowance is that some pensioners could face an effective marginal tax rate of 53.3% on additional income. Those earning between £13,037 and £13,319 a year could pay basic-rate income tax while also gradually losing their new Pension Tax Allowance. This means they could keep less than half of any extra income they receive in this band.
Critics of the new allowance claim that it could also result in unfairness among both pensioners and younger members of society.
Craig Rickman, Personal Finance Expert, Interactive Investor, said: “There could be a situation where one pensioner faces a tax bill and the other doesn’t despite receiving equivalent income, creating a two-tier system. Those who’ve saved in private pensions may feel unduly punished by taking sensible decisions during their careers, while low-earning workers who are also feeling the pinch from rising costs and frozen tax thresholds may also feel left out in the cold.
“In an ideal world, the £12,570 personal allowance, which is scheduled to remain at its current level until 2030/31, would increase for everyone. This would solve the state pension headache and keep the playing field level across society. Andy Burnham hinted in the summer that was something he’d like to do, but given its absence from this Budget, it’s clear the cash isn’t there to fund this giveaway.”
2) Two-year rule on pension death benefits removed
The Chancellor has scrapped the two-year deadline for paying certain pension death benefits tax-free. From Budget Day, eligible payments made more than two years after a pension provider learns of a member’s death will no longer automatically trigger an income tax charge.
Previously, when someone died before turning 75, their beneficiaries could receive qualifying pension death benefits tax-free, provided enough of the relevant tax-free allowance remained. But if the pension provider failed to pay out within two years of being notified of the death, the benefits could become taxable, even when the delay was beyond the family’s control.
Alex Pugh, Chartered Financial Planner and Partner at wealth management firm Saltus, said: “Removing the two-year rule is a welcome fix that will spare grieving families an unexpected tax bill simply because a pension payout was delayed while an estate was settled.
“Alongside clearer rules on collecting tax where large death benefits exceed the allowance, and easier access to pension savings for people who are terminally ill, these are sensible changes that make a difficult time a little simpler.”
3) State Pension increase confirmed and triple lock to change from 2030
The expected 3.9% earnings-linked uplift to the new state pension was confirmed in the Budget. This will take the weekly new full state pension from £241.30 a week to £250.80 a week, and the basic state pension from £184.90 a week to £192.10 a week.
The triple lock, which determines how much the state pension rises each year, will continue until April 2029, with annual increases based on whichever is highest: inflation, earnings growth or 2.5%.
From April 2030, the Government plans to change this to a ‘double lock’ with annual increases based on the highest of inflation or 2.5%. The Government says the reform will make spending more predictable and reduce the risk of the pension continually rising relative to earnings. It has pledged that it will still hold its value relative to earnings over time.
Rob Morgan, Chief Investment Analyst at Charles Stanley Direct, part of Raymond James, said: “The Government has said the change could save up to £15bn a year by 2040. While the new policy will not come into force until April 2030, and is therefore contingent on the Labour Party being re-elected, or another party agreeing to it, the Government has said it plans to legislate in advance for the change.”
What’s staying the same
While the Budget introduced some changes to pensions, several important rules remain unchanged. The planned cap on National Insurance savings through salary sacrifice will still go ahead; there were no new announcements on inheritance tax and pensions, and the tax-free cash allowance and pension tax relief rules remain untouched.
1. Salary sacrifice cap confirmed
The Chancellor confirmed that plans to limit the National Insurance savings available through pension salary sacrifice remain on track. From April 2029, only the first £2,000 of pension contributions made through salary sacrifice each year will qualify for the National Insurance exemption. Contributions above this amount will generally be subject to National Insurance.
The Government estimates that 74% of basic-rate taxpayers will be unaffected. However, the change could affect people who use salary sacrifice to make larger pension contributions, including higher earners who want to boost their retirement savings beyond the minimum required under auto-enrolment.
Mark Futcher, Head of Defined Contribution Pensions at Howden Employee Benefits, said: “The confirmed salary sacrifice cap is still set to be a barrier in the way of workers saving for retirement and employers supporting them. With 12.2 million people still facing inadequate retirement incomes, tinkering at the edges will not be enough.”
You can learn more about the proposed changes to salary sacrifice in our guide What could changes to salary sacrifice mean for your pension?
2. No further announcements on inheritance tax and pensions
The Budget brought no new changes to the planned inheritance tax reforms affecting pensions, which are due to take effect from April 2027. Under these rules, most unused pension funds and certain death benefits will be included in a person’s estate when calculating inheritance tax. Frozen inheritance tax thresholds and changes to business and agricultural property relief could also mean more families face a potential bill.
Fraser Kerr, Head of ii Advice at Interactive Investor, said: “The absence of a new inheritance tax announcement does not mean nothing is changing for families. Frozen thresholds, tighter business reliefs and the decision to bring most unused pension funds into estates from April 2027 are already set to widen the net.
“Rising property and investment values mean more families can face an inheritance tax bill without considering themselves wealthy or realising they may be affected.
“Planning early matters. Keeping a will and pension nominations up to date and understanding the gifting rules can all help, but inheritance tax is complex and the right approach will depend on individual circumstances.”
“Ultimately, reducing a potential inheritance tax bill should sit within a financial plan that protects your own future – potentially through the help of a financial adviser. Cashflow modelling can help people understand what they need for retirement, what they can afford to gift and how decisions today could affect their options later.”
You can find out more about what’s changing next year and what you can do about it in our articles Inheritance tax and pensions: what’s changing in 2027 and 5 ways to beat pension Inheritance Tax Budget changes.
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If you’d benefit from expert advice on how inheritance tax changes could impact your pension, Rest Less members can book a free initial consultation with Fidelius, a Chartered Financial Planning firm. It’s a chance to chat with a qualified financial advisor about your finances and how you might be able to reduce any potential IHT liability. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Fidelius is rated 4.7/5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
3) Tax-free cash and tax relief untouched
The Budget did not announce any changes to the rules governing tax-free pension cash or the tax relief available on pension contributions. For now, eligible savers can still usually take up to 25% of their pension as tax-free cash, subject to the relevant limits and rules. The standard lifetime allowance for tax-free lump sums is £268,275 for most people, although protections and other circumstances can affect this. Learn more about tax-free cash in our article How much tax-free cash can I take from my pension? and about tax relief in our guide How does pension tax relief work?
However, other tax changes announced in the Budget could influence how people choose to save for retirement. From 6 April 2027, income tax rates on savings interest and property income are due to rise by four percentage points in England, Wales and Northern Ireland, reaching 24% for basic-rate taxpayers, 44% for higher-rate taxpayers and 49% for additional-rate taxpayers.
This could make pension contributions more attractive to some people because contributions may qualify for tax relief, while investments held within a pension can grow free from UK income tax and capital gains tax.
For example, someone who has used their ISA allowance and is paying tax on savings interest might consider putting some longer-term savings into a pension instead. However, pension money is usually inaccessible until age 55, rising to 57 for most people from April 2028, and withdrawals may be taxable. It is therefore important to weigh the potential tax advantages against the need to keep money accessible. Learn more in our article Will the pension access age rising to 57 affect you?
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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