Pension Advice After Recent Budget Announcements

Click here to read the full Whitings 2025 Budget Analysis and Commentary

Speculation about what Rachel Reeves would announce in this year’s budget reached fever pitch over the last few months, with many people taking action based on this speculation, rather than fact. This made advice and planning with any certainty obviously very difficult. I just wanted to pass some comment on the most frequently asked pension related questions we have been receiving on the lead up to this budget and what we know at this point following the 2025 budget announcements.

Tax Free Cash

The tax-free lump sum allowance has again not been changed in this budget, meaning in most circumstances 25 % of the pension can be taken tax-free, subject to the current standard limit of £268,275. Uncertainty however is likely to linger and speculation return in next years budget once again, without a clear commitment to a longer term pension policy which would enable people to plan for their retirement.

As happened before last year’s budget, some people took their tax free cash earlier than they planned to or needed to. Some have made gifts to their families, others have the money sitting in a taxable environment now and clearly need to consider or get advice on how they can manage this increased liability going forward.

Tax Relief 

The amount you can pay into pensions has not changed at this time, nor the ability to get tax relief on your contributions at your highest marginal rate. This could offer a tax efficient way of drawing funds from a company or obtaining tax relief whilst you are working, with the potential of possibly drawing it later in life at a lower tax rate. However, if you have been using salary sacrifice to tax efficiently fund your pensions –

The changes to salary sacrifice – The government will limit the amount of someone’s salary that can be sacrificed through pension contributions without incurring National Insurance (NI) payments to £2,000, chancellor Rachel Reeves has announced, adding significant complexity where this is used. There is however time to prepare, with implementation not expected until 2029, which should allow current plans to be reviewed, payroll systems to be updated and processes adapted.

Inheritance Tax

Already announced at the 2024 Budget:

From April 6, 2027, the value of pension funds immediately before death will be included in an individual’s estate for IHT purposes. Previously, pensions enjoyed an exemption from IHT, providing an opportunity for transferring wealth across generations.

Under the new rules:

• If the estate exceeds the IHT nil-rate band, IHT will apply to the pension value.
• The IHT liability will be deducted by the pension scheme administrator before the funds are distributed to beneficiaries.

It is important to remember that at this time, until the changes take effect in April 2027, pensions in most circumstance are currently still outside of estates for IHT purposes.

This change could significantly impact high-value estates, as it introduces additional complexity and costs to inheritance planning. Further compounding the issue is the potential for double taxation in certain circumstances. Many individuals may also be affected by the changes to business property relief and agricultural property relief announced last year, which are due to come in from next April, a year before the pension changes, but there is time to adapt, so consult with your advisors now if you have not already started doing so.

What Should I Do?

Sometimes it can be useful to read planning suggestions online or the papers for those that still get them, however these rules are very complex and the best course of action is often very different depending on your personal circumstances. What might be a good idea for some, may not work for others. We would recommend that you sit down with your tax adviser and financial planning adviser shortly, so you can start to consider how these changes may affect your own personal planning.

Disclaimer - All information in this post was correct at time of writing.