On 30 October 2024, Rachel Reeves became the first woman in history to deliver a Budget in the UK parliament. In her speech, the chancellor outlined a range of tax changes designed to raise revenue for the government.
Naturally, you may be concerned about how these changes might affect your finances, particularly when it comes to your retirement plan.
Read on to learn how the October 2024 Budget announcement could affect your pension savings.
Your pension will no longer be exempt from Inheritance Tax from 2027 onwards
Perhaps the most significant change from this Budget is that pensions will no longer be exempt from Inheritance Tax (IHT) from 6 April 2027 onwards.
IHT is a levy that your beneficiaries could pay on a portion of your estate after you pass away.
In the 2024/25 tax year, you can normally pass on up to £325,000 without IHT. This is known as your “nil-rate band”. You may also benefit from an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.
Further to this, you can normally pass your entire estate to your spouse or civil partner tax-free, and they inherit your unused nil-rate bands. Consequently, you may be able to pass on up to £1 million between you.
Any portion of your estate, including property, cash savings, investments, and other valuable assets that exceeds the nil-rate bands is typically subject to IHT at a rate of 40%.
Currently, your pensions do not normally form part of your estate for IHT purposes. As such, by leaving as much of your pension wealth invested as possible, and relying on other savings to fund your lifestyle, you could pass on more of your estate without IHT.
However, in her Budget announcement, Reeves revealed that this exemption would end and so from 6 April 2027, your pensions will be considered part of your estate for IHT purposes.
The chancellor also revealed that she would extend the existing freeze of the nil-rate bands by two years, to 2030.
Meanwhile, house prices may rise and the value of your savings and investments could increase over time. As a result, it could be more likely that the value of your estate exceeds the threshold, meaning your family pays more IHT.
Yet, you may find it more difficult to mitigate a large bill after April 2027 as pensions will no longer be exempt from IHT.
As a result, you might need to explore other options for reducing your tax liability, such as lifetime gifting. We can support you with this.
Many of the previously rumoured changes to pension tax rules did not appear in the Budget
There was much speculation in the lead up to the Budget as the chancellor made it clear that she hoped to raise a significant amount of revenue to balance the public finances. This proved to be true as she announced planned increases to tax revenues estimated to gather £40 billion.
Prior to the announcement, many savers feared that there would be changes to pension tax rules, especially those relating to tax relief.
In 2024/25, you normally automatically benefit from 20% tax relief on your pension contributions at source. You can also usually claim another 20% or 25% through self-assessment if you are a higher- or additional-rate taxpayer.
There were rumours that the chancellor would change these tax relief rules. Depending on your situation, this could have reduced how much tax relief you would benefit from, potentially making it more difficult to build wealth in your pensions.
Alternatively, there were concerns that Reeves might reduce the Annual Allowance. This is the total amount of tax-efficient contributions you can make to your pension each year without being subject to a tax charge, assuming you do not carry forward unused Annual Allowance from previous tax years. This limit includes individual, third-party and employer contributions, and tax relief.
Additionally, some commentators speculated that the government could change the Lump Sum Allowance (LSA) or Lump Sum and Death Benefit Allowance (LSDBA).
Normally, you can take the first 25% of your pension as a tax-free commencement lump sum. However, in 2024/25, the LSA caps the total amount of tax-free cash you can take at £268,275.
Meanwhile, the LSDBA limits the total value of tax-free cash and death benefits that can be paid from a pension. In 2024/25, it stands at £1,073,100.
Your LSA and LSDBA may be higher if you previously had a protected Lifetime Allowance (LTA), or could be reduced if you had already accessed your pension before the removal of the LTA.
Changes to the LSA or LSDBA could have meant that you and your family paid more tax when drawing from your pensions.
Fortunately, Reeves did not make these rumoured changes and, for the most part, pension tax rules remained the same.
This means the:
- Annual Allowance will remain at £60,000 as it is in 2024/25
- LSA will remain at £268,275 and LSDBA at £1,073,100 as they are in 2024/25
- Amount of tax relief you receive on your contributions will remain in line with your marginal rate of Income Tax.
Consequently, the Budget announcements should not affect the amount you are able to contribute to your pension, or the tax you pay when drawing from your savings. However, you may want to make some changes to your estate plan as your pension will no longer be exempt from IHT from 2027 onwards.
Get in touch
If you have any more concerns about how the Budget could affect your retirement plan, please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
