What the Autumn Statement means for your pension
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Chancellor Reeves finally delivered her much-anticipated budget on the 30th of October, 2024. Many have been asking what this means for their job, taxes and wider household finances.
Retirees (and those approaching retirement) are also processing the implications for their pensions. Below, our Grantham financial advisers share our initial thoughts on this specific subject in more detail.
Specifically, the Autumn Statement is making a big change to the treatment of pensions under inheritance tax (IHT).
We hope this content clarifies things for you. To discuss your own pension or financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
01476 855 585
info@casfin.co.uk
Pensions and Inheritance Tax
For many years now, pension “pots” (defined contribution pensions) have been exempt from inheritance tax (IHT) when an individual dies.
This made pensions incredibly useful for both retirement planning and estate planning. Not only could savers build up their savings tax-efficiently throughout their working life (e.g. via “tax relief” on contributions), but anything left over could be kept within the family upon their passing.
One complicated (but not completely unexpected) feature of the 2024 Autumn Statement is the planned removal of this pension perk. From 2027, pension pots will be counted as part of the value of someone’s estate.
This means that pension savings will potentially be subject to IHT upon death. For instance, in 2024-25, the nil rate band (NRB) stands at £325,000. If an individual dies in 2028 and has total pension savings of £400,000, then £75,000 could be subject to the standard 40% IHT rate (assuming no other assets or allowances).
Please note that this change is subject to a consultation period before being passed into law.
The implications for this change are quite significant. Previously, financial advisers often suggested to clients seeking to mitigate IHT that they focus on living off ISA savings early in retirement instead of pensions. This was because savings and investments in an ISA were not typically exempt from IHT, whereas pension pots were.
However, from 2027, ISAs and pensions are set to be on a more even footing for estate planning purposes. To mitigate IHT, clients will need to discuss other “non-pension” options with their financial adviser. Fortunately, there is still time to explore options.
For instance, gift-giving could play a more important role in estate planning. In particular, “gifts made out of income” might be something to discuss with an adviser. Here, regular payments to your loved one(s) could be exempt from IHT if they are deemed to form a “normal pattern” of expenditure and do not undermine your standard of living.
It is worth noting that the Autumn Statement also confirmed that the freeze on IHT thresholds would be extended by two years until 2030. So, if your estate increases in value (e.g. due to equity growth in your family home), more wealth could be dragged into IHT if you do not plan carefully. To explore your options for addressing this, speak with a financial adviser.
The State Pension
One key announcement from the Autumn Statement was the Chancellor’s confirmation about the State Pension next year.
First of all, the government reaffirmed its manifesto promise to keep the “triple lock” system. This ensures that the State Pension rises every April by following one of three measures (whichever is highest):
- The rate of inflation
- Average earnings
- 2.5%
The Autumn Statement mentioned that the State Pension would be “Uprated by 4.1% in 2025-26.” According to the government’s estimations, this could provide an extra £470 for 12m pensioners next year.
However, the precise increase per person will depend on unique factors, such as their National Insurance (NI) record.
It is worth noting that the 4.1% State Pension increase is above the forecast for CPI (Consumer Price Index) inflation, which the Bank of England (BoE) expects to stand at 2.6% in 2025.
This hopefully means that retired people should retain the spending power of their State Pension in 2025, possibly enjoying a real terms increase.
However, there is still a looming issue hanging over the State Pension. The Chancellor mentioned that income tax thresholds would remain frozen until 2028-29. After that, they will rise in line with CPI inflation.
In the meantime, the full new State Pension is forecast to cross the 20% Basic Rate threshold within three years. The government’s approach to this is still unclear.
Pension Credit
What about pensioners who receive benefits?
Pension Credit is vital for many retired UK households, providing extra money for those struggling to meet the cost of living.
The Autumn Statement confirmed that the Pension Credit Standard Minimum Guarantee (PCSMG) will also rise by 4.1% in April 2025.
For instance, for a single pensioner, the PCSMG could go up from approximately £11,400 per year to £11,850 from the 6th of April 2025.
The Winter Fuel Payment was not mentioned in the Autumn Statement. Early in July, the government announced that this universal benefit would now be means-tested.
Invitation
The Autumn Statement is bringing some big changes to UK pensions, especially regarding IHT planning. We will be elaborating on this further in the near future, in new blog posts.
If you are interested in discussing your own financial plan or retirement strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
