Autumn Budget 2024: possible changes to pension rules

21 October 2024

Written by Retirement Line

The upcoming Autumn Budget on 30 October 2024 is raising important questions about potential changes to the UK’s pension landscape. 

For those of us in or approaching retirement, any shifts could have a significant impact on retirement planning. There has been much speculation about changes to issues affecting those saving into pensions, and those deciding what to do with their defined contribution pension savings after age 55.

These rumours have included:

• Reducing the amount of income tax relief that savers receive on their pension contributions

• Levying employers’ National Insurance contributions on workplace pension contributions

• Reducing the amount of tax-free cash that people can take from their pension when accessing their pension savings

• Charging Inheritance Tax on pension funds on death

The majority of our customers who have expressed concern about the Budget have mentioned the possible reduction of their tax-free cash entitlement, and/or the potential inheritance tax charge on their death. With that in mind, we look at both of these issues below.

The 25% tax-free cash lump sum

There has been much speculation surrounding tax-free cash. Most pension schemes allow you to take 25% of your pension fund(s) as a tax-free cash lump sum. The technical name for this is Pension Commencement Lump Sum (PCLS). 

Currently, for the vast majority of people, the Lump Sum Allowance restricts the total amount of tax-free cash to £268,275 over a person’s lifetime. (Some people are entitled to more by having relevant Protections or Certificates in place.) 

The recent reports in the media suggest that the Chancellor may reduce the 25% tax-free amount by:

• Reducing the maximum percentage to less than 25% of your pension fund(s), or

• Reducing the Lump Sum Allowance (a figure of £100,000 has been mentioned by the Institute for Fiscal Studies)

In light of the speculation, some pension experts have voiced their concern about changing the tax-free cash arrangements. Tom Selby of AJ Bell was quoted by This is Money, saying that this move would be “deeply unpopular and fundamentally undermine wider government efforts to boost long-term investing” as well as being “hugely complicated”.

According to Money Week, Becky O'Connor, director of public affairs at PensionBee, said:

 “The tax-free lump sum element to pensions is popular and one of the most universally well-understood benefits of a pension. Because of its popularity, making it less generous would be a risk.

“A small cut to the maximum, say to £250,000, would not technically affect most people, who do not have enough in their pension to be impacted, and could be justified on the basis that the current limit is not a good round number.”

Inheritance tax (IHT) on pension pots

There is also speculation that pension funds could be included in estates for Inheritance Tax (IHT) purposes. This would prevent pensions from escaping IHT when a pension holder passes away. This could generate additional revenue for the government - but at the expense of wealthier retirees. 

Currently, you can pass pension savings on to beneficiaries without incurring tax if you die before reaching 75. However, if death occurs after the age of 75, those inheriting the pension will pay income tax at their marginal rate on any withdrawals they make. This could result in a tax liability either higher or lower than the standard 40% IHT rate.

There is speculation about the Chancellor including pension pots in estates for Inheritance Tax purposes, potentially subjecting them to IHT in the future​. However, there is a risk that this could make pensions less attractive as a tax-efficient way to pass on wealth​.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, was quoted on this subject at FT Adviser:

“The government may consider it low-hanging fruit, which is why this particular rumour has been aired more than once in the past few months. This change would be a blow to anyone planning to pass on their pension wealth to other family members. 

“It would also spur people to spend their pension while they are still alive, whether that be through more gifts to loved ones or through extra spending.”

Nothing is certain until the Budget

Of course, the above information is speculation, and nothing is certain until the Autumn Budget itself on 30 October. So, what should you do if you are currently making a decision about matters that may be affected by the Budget?

In our experience, choosing when to access your pension, for either income or tax-free cash, or both, is an important decision and has to be right for you. Your decision should be primarily based on your individual circumstances rather than trying to second guess what politicians may or may not do. But ultimately, it is your decision.

If you believe the time is right for you to access your defined contribution pension pot then please call us on 0800 652 1316 or request a free call back from one of our annuity specialists. 

Our Annuity Specialists can carefully explain all of your options, and provide a comparison of annuity quotes at the leading providers’ latest annuity rates. As the UK's largest annuity broker*, we help thousands of people each year secure the highest available guaranteed income from their pension savings.

You can also get help from Pension Wise, the government-backed guidance service for people aged over 50. Retirement Line can also introduce you to a regulated financial advisor for further help with your retirement planning and income choices. 

Image of Rachel Reeves from gov.uk under the Open Government Licence