The 2025 UK Budget has introduced several pivotal changes to pension laws that will impact both retirees and those planning for retirement. Understanding these adjustments is crucial for effective financial planning. Here’s a concise overview of the most significant updates:
1. Inheritance Tax on Pension Benefits
A notable shift involves the treatment of death benefits from registered pension schemes. Starting from 6 April 2027, these benefits will be included in the deceased member’s estate for inheritance tax (IHT) purposes. This change aims to prevent the use of pensions as a means to avoid IHT. The government is currently consulting on these proposals, with further consultations on draft legislation expected later in 2025.
2. State Pension Increase
The government has upheld the triple lock policy, resulting in a 4.1% increase in the State Pension effective from 6 April 2025. This adjustment raises the weekly amount of the new State Pension from £221.20 in 2024/25 to £230.25 in 2025/26, providing retirees with a modest boost in their retirement income.
3. Freezing of Income Tax Thresholds
The decision to freeze income tax thresholds until 2028 means that as State Pensions increase, more pensioners may find themselves liable for income tax. By April 2027, the full new State Pension is projected to exceed the tax-free personal allowance, potentially leading to a tax burden on pension benefits for many retirees.
4. Auto-Enrolment Thresholds Maintained
The Pensions Minister has confirmed that all auto-enrolment (AE) thresholds will remain at their 2024/25 levels for the 2025/26 tax year. This means the lower earnings limit of the qualifying earnings band stays at £6,240, the upper earnings limit at £50,270, and the AE earnings trigger at £10,000. Maintaining these thresholds ensures consistency for employers and employees participating in workplace pension schemes.
5. Tax Code Adjustments for New Pension Recipients
From April 2025, improvements in tax code information usage will be implemented for individuals newly receiving private pensions. These changes aim to ensure that new pensioners pay the correct amount of tax more promptly, reducing the likelihood of overpayments or underpayments at the end of the tax year.
Looking Ahead
While 2025 may appear to be a quieter year in terms of pension reforms, a Pension Schemes Bill is anticipated, which could signal further significant developments. Staying informed about these changes is essential for both employers managing occupational pension schemes and individuals planning their retirement.
As the pension landscape evolves, it’s advisable to consult with financial advisors to understand how these changes may affect your personal or organizational financial planning. Proactive engagement with these updates will help ensure that you remain well-prepared for the future.