Impact of a Labour administration on personal pensions explained.
The UK government is set to unveil significant changes in retirement taxes in the upcoming Budget on 30 October 2025. The focus will primarily be on tax-free cash and inheritance tax (IHT) on pension savings.
Regarding tax-free cash, there is speculation that Chancellor Rachel Reeves may reduce the tax-free lump sum that retirees can currently withdraw. At present, individuals can take up to 25% of their pension pot tax-free, up to a maximum of £268,275. The proposal under consideration could involve cutting this tax-free portion or delaying access to it as a revenue-raising measure expected to generate up to £2 billion per year. However, these are still rumours based on recurring leaks and industry speculation, urging caution; last year similar rumours did not result in immediate changes.
For inheritance tax on pensions, a more concrete change was announced in the October 2024 Budget and will take effect from April 2027. Most pension savings will then be subject to inheritance tax, ending the current tax-free status for inherited pension pots except when passing directly to a spouse or civil partner. Under the new rules:
- Pension pots will be included in the deceased’s estate for IHT purposes, potentially incurring up to 40% tax for large estates.
- While spouses/civil partners can still receive pensions tax-free, beneficiaries beyond them will face new taxation.
- This reform introduces significant administrative challenges for executors and pension providers due to a six-month window to settle IHT payments without accruing interest.
- Industry groups warn this could add stress and may affect people's pension saving behavior, possibly undermining long-term financial planning.
The government's Pension Schemes Bill, unveiled in July by Keir Starmer's government, aims to address the problem of small pots, consolidating them in one place to prevent people from losing track of their money. The bill also requires pension schemes to offer better options to savers once they reach retirement age.
The consolidation of defined benefit schemes could reduce the risk of pensioners losing part of their pension if their employer becomes insolvent. The Local Government Pension Scheme, planned to be consolidated, could benefit 6.6 million public sector workers. The government aims to take action to "unleash the full investment might of the £360 billion Local Government Pension Scheme to make it an engine for UK growth."
The government's pensions review will come in two parts, with the first phase focusing on investment and the second focusing on retirement adequacy. Superfunds, which allow defined benefit schemes to be consolidated into one larger scheme, helping employers manage risks and costs, are part of the government's strategy to address pension consolidation more broadly.
The state pension triple lock is safe for now, but private pensions could come under review, with some worrying about potential reductions or scrapping of the tax-free cash savers are entitled to. Reeves has reportedly ruled out cutting pension tax relief for higher earners. However, she could still consider cutting the amount of tax-free cash savers are allowed to withdraw from their pension pot once they retire.
In summary, the main potential retirement tax changes to watch for in the upcoming UK Budget are a possible cut or deferral in tax-free pension lump sums and the imminent rollout (from 2027) of inheritance tax on pension savings outside of spouses/civil partners. These reforms represent a shift toward increasing tax revenue from pension benefits but also introduce complexity and concerns from the financial industry.
- In the upcoming Budget on 30 October 2025, the UK government is expected to address personal-finance matters, specifically discussing potential changes to tax-free cash in personal pensions.
- The government's Pension Schemes Bill, unveiled in July, aims to address issues related to personal finance by consolidating small pension pots into one, simplifying retirement savings management.
- As part of the government's strategy to review private pensions, there is a growing concern about potential changes to tax-free cash savings, which could impact individuals' personal finance and retirement planning.
