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The recent Autumn Budget has brought some key changes to the way UK residents can build their pensions, particularly when it comes to inheritance, salary sacrifice schemes, and state pension entitlements.
With the state pension age rising to 57 from April 2028, plenty of us will have more time to shape and strategise our pension planning, building pots to match our retirement goals.
However, with life expectancy in the United Kingdom also increasing, more pension savers will have to become tactical with their savings to ensure that their funds stretch for long enough to provide sufficient support.
With this in mind, the recent budget comes with plenty of key considerations for those building their pension pots. But what should you keep in mind when it comes to pension changes? Let’s take a deeper look at three things pension savers should reassess in the wake of Chancellor Rachel Reeves’ latest budget:
1. New Inheritance Tax Rules
One of the biggest changes to keep in mind is the removal of the exemption that kept pension pots as a separate entity from an individual’s estate for inheritance tax (IHT) purposes.
Starting on the 6th of April 2027, unused pension funds and death benefits will be included as part of a person’s estate for IHT at a rate of 40% beyond a total threshold of £325,000.
This means that if you’ve been preparing your pension to pass wealth on to your heirs, it’s time to look to a new strategy.
What actions can you take to overcome these new IHT rules? One of the most effective ways to replan your inheritance strategy is to spend your pension funds before other, more tax-efficient assets like your ISA or property, depending on who the money is for.
Alternatively, you could consider increasing your contributions with the intention of donating 10% to charity. By taking this measure, you can lower the rate of IHT on passing down your pension pot to 36%, which could make a huge difference for larger pots.
2. Updating Salary Sacrifice Strategies
Another significant change to keep in mind affects salary sacrifice, which has long been a major tax-efficient means of boosting pensions by avoiding National Insurance Contributions (NICs).
Announced in the recent budget, the amount of salary sacrifice that’s exempt from NICs will be capped at £2,000 per year, effective from the 6th of April 2029.
If you’ve been using salary sacrifice schemes as a way of sacrificing more than £2,000 per year, it’s important to make adjustments to ensure that you’re not adversely affected by losing the National Insurance advantage you gain on the excess amount moving forward.
This may be a challenge if you’re a high earner looking to lower your tax thresholds or are benefiting from employer matching schemes, but making adjustments sooner rather than later can help you to adapt.
Crucially, you have until 2029 to adapt your pension plans to the new salary sacrifice cap. Whether this means reallocating funds to an ISA or alternative investment product is down to your individual retirement goals and ambitions.
3. Adapting to New Tax Thresholds
Higher state pension rates and frozen tax thresholds mean that more retirees may be facing a higher income tax bill than they may have initially anticipated.
With the state pension rising by 4.8% to £12,547.60 a year, beginning in April 2026, anybody claiming alongside their own private pensions or a part-time income is likely to exceed the £12,570 personal tax allowance.
This calls for a reassessment of your taxable income once you retire. With thresholds frozen until 2031, it’s easy to chart how taxation could work based on your future income.
What could these tax threshold changes mean for your retirement strategy? It may be a good reason to think twice about taking your 25% tax-free cash withdrawal from your pension pot. If you’re planning on taking all the money as a lump sum, it may cause you to fall into a higher marginal tax bracket when combined with your other income, leading to higher tax liabilities than you’d initially anticipated.
Adapting to Changes in Advance
If the pension changes announced in the budget are set to affect you, the good news is that many of the biggest impacts on your future earnings aren’t set to be implemented for at least a few more years. This gives you plenty of time to plan around the new rules for minimal disruption.
For those worried about new tax obligations, such as inheritance tax or income tax, affecting their earnings in retirement, it could be worth reassessing your contributions by opening an alternative tax-efficient savings product like an ISA that could be more effective.
It’s also worth regularly reviewing your pension pot to check how your withdrawals will affect your tax thresholds. By taking measures early on, you can keep more of your savings away from the taxman, helping to support either yourself in retirement or your loved ones when it comes to your estate.
