The run-up to this year's Budget was, once again, dominated by intense speculation about Chancellor Rachel Reeves' potential announcements. This environment of 'what if' made definitive financial planning extremely difficult. Now that the 2025 Budget is behind us, we want to address the most common pension-related questions we've received and provide clarity based on the confirmed changes.
Tax-Free Cash (Pension Commencement Lump Sum)
The good news is that the allowance for your tax-free lump sum has remained unchanged in this Budget. In most cases, you can still take 25% of your pension fund tax-free, subject to the current standard limit of £268,275.
However, we understand that uncertainty may linger. The lack of a clear, long-term government policy on pensions continues to make concrete retirement planning a challenge. A Word of Caution: As we observed before the last Budget, many individuals accessed their tax-free cash earlier than necessary due to speculation. If you currently hold this money in a taxable environment, it is crucial to review your position. You must consider the increased tax liability and seek advice on managing these funds efficiently going forward.
Pension Contributions and Tax Relief
The fundamentals of saving into a pension remain robust: the annual limits on how much you can contribute have not changed, and you still receive tax relief at your highest marginal rate on your personal contributions.
This continues to be a highly effective way to save, offering tax efficiency while you are working, with the potential to draw the funds later in life when you might be in a lower tax bracket.
Key Change: The Salary Sacrifice Cap
Chancellor Rachel Reeves did announce a significant future change affecting salary sacrifice:
- The Government will cap the amount of salary that can be sacrificed into a pension without incurring National Insurance (NI) savings for the individual.
- The limit will be £2,000 per year.
- This introduces considerable complexity for employees and payroll teams who use salary sacrifice to fund pensions.
- Crucially, there is time to prepare. This change is not expected to be implemented until 2029. Use this period to review your current schemes, update payroll systems, and adapt your contribution strategies.
Inheritance Tax (IHT) on Pensions
This is a reminder of the significant change announced in the 2024 Budget, which is still proceeding:
From 6th April 2027, the value of a pension fund immediately before death will be included in an individual's estate for Inheritance Tax purposes.
- Current Status (Until April 2027): In most circumstances, pensions remain outside of your estate for IHT, making them an excellent vehicle for inter-generational wealth transfer.
- Post-April 2027: If your estate (including the pension value) exceeds the IHT nil-rate band, IHT will be levied on the pension's value. The tax liability will be settled by the pension scheme administrator before the funds are distributed to your beneficiaries.
This is a profound shift for high-value estates and introduces potential complications, including the risk of double taxation in specific scenarios. This is further compounded by the upcoming changes to Business Property Relief and Agricultural Property Relief (due in April 2026).
Your Next Step: Review and Plan
Reading planning suggestions in the media can be helpful, but the rules are highly complex. What constitutes a 'good idea' for one person may be detrimental to another due to differing personal circumstances.
We strongly recommend that you arrange a meeting with your tax adviser and financial planning adviser without delay. Starting a considered review now is the only way to ensure your personal retirement and estate planning adapts effectively to these confirmed changes.
