As it turned out, this was a Budget more for ISAs than pensions, but there was one key announcement. The personal allowance for people over state pension age is being raised to the value of the full new state pension.
This is slightly different to pre-Budget reporting, which suggested that the increased allowance would cover only those whose sole income was the state pension. And it’s the likely result of years of frozen tax thresholds and state pension increases meaning that from April 2027, a full new state pension will breach the personal allowance.
It might come as a sigh of relief for those worried about a squeeze on incomes and having to fill out more assessment forms, but it does run the risk of making a complex system even more complicated.
The new allowance is set to run from next April until 5 April 2030, with a taper in place to remove the allowance gradually if an eligible person’s income exceeds the state pension value. We await more detail on how it will work in practice.
Learn more about the Budget and what it means for investors and savers.
What else should pensioners be keeping in mind?
Outside of the Budget, other key changes are coming down the line. And the inclusion of unused defined contribution pensions in estates for inheritance tax (IHT) purposes from April 2027 is a big one. It’s a move that will drag many more estates into the IHT net and could have a big impact on your retirement planning.
Currently, pensions can usually be passed on free of IHT. If death occurs before the age of 75, there’s no income tax to be paid, either. After age 75, income tax becomes payable at the beneficiary’s marginal rate. It’s a system that has led to many opting to spend down other assets first and leave their pensions untouched for as long as possible so they can be passed to loved ones.
This will now likely change.
Do you need to worry about inheritance tax?
This is a big change, and it’s important to take some time to plan the right approach for you and your family.
The key rules to bear in mind are that IHT is levied on estates worth more than £325,000 – known as your nil rate band. If you want to pass your family home down to children or grandchildren, you also get a further allowance – a residential nil rate band – worth £175,000.
Added to this, you can pass on assets of any amount to your spouse or civil partner, and they won’t be liable for IHT. You can pass any of your unused nil rate bands to them, too. This means that a widow/er could pass on as much as £1mn to loved ones without having to worry about IHT.
These rules mean that most people do not usually have to worry about an IHT bill at all.
How can you prepare for inheritance tax changes?
If you think that you may have an inheritance tax issue, then it pays to plan.
The first thing to remember is that none of us know how long we’re going to live, and the priority is to make sure that you have enough money to live well.
It’s always worth making sure that you have not lost track of any old pensions from previous jobs, as this could leave a hole worth thousands in your pension planning.
Contact the government’s pension tracing helpline – all you need is the name of your old employer or the pension provider, and they can give you contact details to get in touch to see if you do have a pension. Once you’ve tracked down your pensions, you may decide to consolidate them.
Having an overarching view of what you have can help you make better decisions. But before you consider transferring, make sure that you are not incurring any exit fees or missing out on valuable benefits like guaranteed annuity rates. It also rarely makes sense to transfer final salary pensions.
Sensible ways to reduce an inheritance tax bill
Once you’ve got a full idea of what you have, you may decide to gift money to loved ones to reduce the value of your estate.
This can bring the benefit of helping loved ones reach their financial milestones – for instance, buying their first home that much more quickly. Generally, you can gift any amount, and it will fall out of your estate for IHT purposes after seven years.
You can also make use of a variety of gifting allowances – for instance, the £3,000 annual exemption – as well as smaller gift allowances. If your loved ones are young, then contributions to a Junior ISA or Junior SIPP can give them an early lesson in how investing works as well as giving them a significant financial head start.
Remember, money in a pension is usually accessible from 55 (rising to 57 in 2028, and this could be higher still by the time today’s children reach that age). Pension and tax rules can also change, and benefits depend on circumstances.
Another key way to gift is using the gifting out of excess income rules. These let you gift as much as you like without worrying about IHT, but the caveat is that the gifts must be regular, out of income and not capital and that your standard of living is not impacted by giving the gift.
As with all gifting, it’s vital to keep notes of what you have given to whom if your loved ones are asked to evidence your gifting. Speaking to a financial adviser to make sure that you’ve used the allowances properly can give you and your family valuable peace of mind. They can also help you make sure that your gifting is sustainable, as you don’t want to risk running out of money later in life.
How is salary sacrifice changing
Another key pension change on the horizon is changes to salary sacrifice from April 2029.
Salary sacrifice is a valuable benefit that lets you give up a portion of your salary in return for a benefit like a pension contribution. Because your salary is lower, you pay less income tax and national insurance as a result. This can be a great way of boosting pension planning.
From April 2029, the national insurance relief will be restricted to the first £2,000 of pension contributions. It still means that pensions are a really tax-efficient way to save for retirement; it’s just that if you contribute more than £2,000 to your pension every year, your national insurance saving will be less.
With several years to go until the change comes in, you have time to make the most of your allowances as they currently stand. However, before using salary sacrifice, bear in mind that because your salary is lower, it may affect any mortgage applications you might make or your entitlements to maternity/paternity pay.
This article is for information only and not personal financial advice. Investments can go up and down in value, so you could get back less than you invest. If you’re not sure what’s right for you, a financial adviser can help.