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There is always speculation in the run-up to any Budget that we could see significant changes to pensions, including some of the valuable tax benefits that they currently offer, as the Chancellor battles to reduce the budget deficit.
Possible changes could include a review of current generous tax relief on pension contributions whilst some commentators think there’s a chance we could see the amount you can take tax-free from your pension reduced. It’s worth bearing in mind, however, that until Budget day on October 28 itself, no one knows exactly what will be unveiled, so you should think very carefully before making any knee-jerk decisions at this point.
Here’s what we know so far, and why it’s really important not to let conjecture deter you from saving for the future.
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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.
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What we already know is changing
The State Pension triple lock will change after the current Parliament in 2030, Prime Minister Andy Burnham announced at the Labour Conference in September, with savings from the reform used to help fund a new National Care Service.
Under the current ‘triple lock’ guarantee, the State Pension rises each April by whichever is highest: inflation, average earnings growth or 2.5%. The aim is to ensure the State Pension maintains its value over time.
However, from April 2030, the triple lock will become a ‘double lock’, with the State Pension instead rising in line with either inflation or 2.5%, whichever is higher. The Government says the savings from the change will help fund a new National Care Service.
Burnham said the State Pension would remain protected so that its value relative to earnings is maintained over time. He also said people on the lowest incomes would not be pushed into paying income tax as a result of the changes.
You can learn more about this change in our article What will changes to the State Pension triple lock mean for you?
Pensions and inheritance tax
The biggest change to pensions that is on the horizon is that they will be brought into the scope of inheritance tax from April 2027.
Emma Sterland, Chief Financial Planning Director of Evelyn Partners and Managing Director of NatWest Private Banking and Wealth Management, said: “It will transform many savers’ plans for how they use their pensions, and for those who it catches unawares, a large and in some cases unnecessary tax bill could be the upshot.
“Not only will the pension be subject to IHT where the deceased’s estate exceeds the nil rate band – but for those aged 75 and older the income tax rule still applies, meaning an effective tax charge to the beneficiary receiving the funds of 52% for basic rate taxpaying beneficiaries, 64% for higher rate and 67% for additional rate.
“Many families who do not currently have to worry about IHT will suddenly be drawn into the tax net as their estate exceeds their nil-rate bands thanks to the addition of pension wealth.”
The forthcoming changes mean some people are now considering whether to use or pass on their pension wealth sooner rather than later.
“Some savers are taking their tax-free cash to spend, gift or reinvest, because this is a valuable benefit that will effectively die post-April with the pension holder,” said Ms Sterland. “Others are looking to use the “normal expenditure out of income” exemption by withdrawing unneeded income from their pensions and gifting it steadily over time. Those 75 and older are even more likely to consider drawing down from pensions given the risk of double taxation of the pot at death.
“However, what’s right for one family will not be right for the next, so for instance we are always careful to stress that savers must make sure they retain enough assets to give them the retirement they want and to pay potential care costs. Talking to a financial planner can be invaluable in these complex situations, as it helps to clarify goals and objectives, and to understand how certain financial steps can achieve them.”
You can find out more about these changes in our guide Inheritance tax and pensions: what’s changing in 2027.
What could be in store for pensions in this year’s Budget?
No one knows what will be in the Chancellor’s red box this October, but below we’ve outlined some of the possibilities the government may be looking at. Remember that this is all speculation for now, and it may be that no further changes to pensions are announced.
Will I still be able to take my 25% tax-free cash?
Many pension savers are concerned that the October Budget might see the Chancellor John Healey clamp down on current rules, which allow you to take 25% of your pension savings tax-free from the age of 55 (rising to 57 from 2028). You can learn more about changes to the pension access age n in our guide Will the pension access age rising to 57 affect you?
At the moment, you can take a maximum pension tax-free cash lump sum of £268,275 out of your pension, or 25% of the old Lifetime Allowance. This is known as your Lump Sum Allowance (LSA). Find out more in our article How much tax-free cash can I take from my pension?
Scrapping these rules would prove hugely unpopular with pension savers, and could be perceived as a disincentive to put money away for retirement, so it seems unlikely that Labour would do away with them altogether. However, it is possible that the new government might look at reducing the maximum tax-free lump sum you can take, perhaps to £150,000 or £100,000.
Bear in mind that taking out your 25% tax-free lump sum, especially if you do this early on, can have a significant impact on your retirement income later on, so you should seek professional financial advice on the best course of action to take based on your individual circumstances. You can read about all the pros and cons in our guide Should I take a tax-free lump sum from my pension?
Will pension tax relief remain the same?
Unlike the Conservatives, Labour made no pledges in the run-up to the election that pension tax relief would remain untouched.
The previous Chancellor Rachel Reeves previously said she would support the introduction of a flat rate of pension tax relief which, whilst benefiting basic rate taxpayers, would leave higher and additional rate taxpayers worse off.
It’s very unlikely that any changes to pension tax relief, if introduced, would be retrospective, so tax relief you’ve benefited from in the past should be safe. However, if you’re worried that tax relief could be restricted in future, you may want to consider making the most of current rules now.
At the moment, you can earn tax relief on pension contributions of up to 100% of your earnings, or £60,000 a year, whichever is lower. If you’re earning £70,000 a year, for example, that means you’d be able to pay up to £60,000 of this into your pension.
Any pension payments you make over the current £60,000 threshold are subject to the usual income tax rates. You can also carry forward any unused Annual Allowances from the previous three years, provided you belonged to a pension scheme during those years. You can learn more about carry forward in our guide Pension carry forward explained.
Sarah Coles, head of personal finance at AJ Bell, said: “While the sensible approach would be for the government to commit to making no changes to tax relief, and to do it early, if there are no commitments forthcoming, you can take advantage of pension tax relief while you know where you stand. Consider how much you can afford to pay into your pension, and boost your contributions if it makes sense. If there ends up being no change, all you’ve done is improve your retirement finances.”
Could there be changes to pension allowances?
There’s also the possibility that we could see the reintroduction of the Lifetime Allowance, which was the maximum amount you could save into your pensions over your lifetime, without having to pay any extra tax charges when you take money out. This was abolished by the then-Conservative Chancellor Jeremy Hunt in April 2024 to encourage pension savers to stay in the workplace longer and continue paying into their pensions.
At one point prior to being elected, Labour said it wanted to reinstate the Allowance to prevent high earners from enjoying this tax break, but its reintroduction would prove incredibly complex and could result in the highest earners stopping work early to avoid being hit by tax charges.
Find out more about pension allowances in our articles Labour u-turns on pension Lifetime Allowance and How do pension allowances work?
Auto-enrolment shake-up
Millions of people aren’t putting away nearly enough to provide them with a comfortable retirement, so the Labour government could potentially announce higher auto-enrolment contribution limits or expand auto-enrolment further to include more workers.
At the moment, if you’ve been auto-enrolled into your employer’s workplace pension scheme, the minimum contribution is 8% of ‘qualifying earnings’. Of that 8%, your employer can’t contribute less than 3%, but they can pay as much of the 8% as they want. If you’re not sure how much you should be putting away for the future, read our article How much should I save for retirement?
Maike Currie, VP Personal Finance, PensionBee, said: “Auto-enrolment was designed for a Britain where most people bought a home, stayed in one job for years and retired as part of a stable couple household. Today Britain looks very different, with rising housing costs, more fragmented careers and changing family structures.
“The fastest-growing group of future retirees are people who rent, move between different types of work, live alone or have caring responsibilities that interrupt their savings. The system has not kept up.”
You can find out more about how the system works at the moment in our guide How does pension auto-enrolment work?
Finally…
It’s vital not to make any panic decisions based on what you think might happen to the pensions system in the Budget, and if you’re unsure how to proceed, to seek professional advice.
Craig Rickman, personal finance expert, interactive investor, says: “It’s little surprise that investors desperately want the government to avoid making further changes to pension tax.
“Speculation about reform in this area ran wild before the past two budgets. And although some of the key rumours fortunately didn’t materialise, notably cuts to the tax-free cash element, the changes that were proposed, coupled with the weight of the pre-event reports, have understandably left a mark on investors.
“With most unused pension savings forming part of inheritance tax calculations from April 2027, and the salary sacrifice cap arriving two years later, there are concerns that further tightening to the retirement tax framework might be in train, with policymakers viewing pensions as low-hanging fruit when seeking to raise additional revenues.
“But investors need continuity and consistency in this area so they can plan in confidence. It’s unfair for people to make prudent decisions under the rules at the time, only to find down the line the rug’s been yanked out from under them.”
Learn more in our article The costly pension mistake people made before last year’s Budget (and why you shouldn’t repeat it).
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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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