This afternoon, Rachel Reeves MP, the Chancellor of the Exchequer, delivered a Budget speech that had many firsts. This is the first time that the Budget speech has been delivered by a woman. It is the first Budget following Labour's landslide election in June 2024 and the first Labour Budget since Alistair Darling in March 2010.

There is keen interest in the pensions aspects of the budget - from trustees and sponsors, professional advisers and both the industry and mainstream press. For a Chancellor who needs to fill a fiscal hole, the UK pensions system offers a potential cornucopia of tax reliefs to cut and revenue to raise. But, while this luscious fiscal fruit may be low hanging, it is not easily harvested. And so it proved.

Few policy areas attract as much vested and passionate interest as pensions and the Chancellor opted not to risk valuable political capital by making sweeping changes to pensions taxation. The Government instead went for more conventional tax raising measures (e.g. on employer national insurance and capital gains tax). Full documentation supporting the Budget Statement is available from HM Treasury's website.

Key pensions points covered in the Budget

  • The Government has announced one main change to the pensions taxation system. It is, however, one that will be of material importance to scheme administrators and certain members. On and from 6 April 2027, inherited defined contribution (DC) pensions (e.g. unused DC pension pots) and death benefits (other than spouse's and/or dependants' scheme pension and charity lump sum death benefits) payable from any registered pension scheme will be brought into the broader inheritance tax regime. In addition, on and from 6 April 2027, pension scheme administrators will be responsible for reporting and paying any inheritance tax due on pensions to HMRC.
  • There were two smaller measures announced in the detailed Budget documentation relating to the broader tax system that will affect the UK pensions industry:
    • Transfers of pension benefits to
      • Overseas Pension Schemes; and
      • Recognised Overseas Pension Schemes
      that are based in the European Economic Area (EEA) and Gibraltar will, with immediate effect, no longer be exempt from the Overseas Transfer Charge that applies to transfers to Qualifying Recognised Overseas Pension Schemes (known as QROPS).

      Such schemes will also have to comply with the requirements of the QROPS regime on and from 6 April 2025; and
  • scheme administrators of registered pension schemes will be required to be UK resident on and from 6 April 2026.

Pensions taxation

Pensions and inheritance tax

What is the current position?

Most UK registered occupational pension schemes are classed as being discretionary for the purposes of inheritance tax. This generally means that the trustees of the scheme (whether DC or defined benefit (DB)) have discretion in deciding who will receive the death benefits. Whilst members are often able to set out their preferences (e.g. in an expression of wish form), the trustees are not obliged to follow what the member has said.

Payments made on the death of a member to a beneficiary by a discretionary occupational pension schemes are, currently, free of inheritance tax. Death benefits and unused DC pension pots in such schemes do not form part of an individual's estate and are therefore not chargeable to inheritance tax.

There are a small number of registered occupational pension schemes that are non-discretionary (e.g. the NHS Pension Scheme and the Judicial Pension Scheme. Any death benefits in such schemes are treated as part of an individual's estate and are subject to inheritance tax.

What is the Government proposing?

The Government is proposing to remove the distinction between discretionary and non-discretionary schemes so that all death benefits and unused DC pension pots will, on and from 6 April 2027, form part of the deceased member's estate and will be liable for inheritance tax. The usual exemptions that apply to inheritance tax will also apply to pensions assessed for inheritance tax purposes (e.g. that transfers between spouses or civil partners are typically exempt from inheritance tax).

On and from 6 April 2027, pension scheme administrators will be made liable for reporting and paying any inheritance tax due on unused pension funds and death benefits (replacing the current roll of personal representatives in respect of reporting and paying any tax due for non-discretionary pensions schemes).

HMRC's technical consultation on these proposals ('Inheritance Tax on pensions: liability, reporting and payment') will run until 22 January 2025.

Transfers to EEA and Gibraltar-based pension schemes

The Government will remove the exclusion from the Overseas Transfer Charge for transfers to:

  • Overseas Pension Schemes; and
  • Recognised Overseas Pension Schemes

in the EEA (i.e. the member states of the European Union plus Norway, Iceland and Liechtenstein) or Gibraltar with effect from 30 October 2024.

Such will be brought in line with the broader QROPS regime on and from 6 April 2025, when:

  • EEA/Gibraltar-based Overseas Pension Schemes will be required to be regulated by a regulator of pension schemes in that country; and
  • EEA/Gibraltar-based Recognised Overseas Pension Schemes must:
    • be established in a country or territory with which the UK has a double taxation agreement providing for the exchange of information; or
    • have a Tax Information Exchange Agreement in place.

The Government will also require scheme administrators of registered pension schemes to be UK resident from 6 April 2026.

More detail on this is available in HMRC's policy paper 'Reducing tax-free overseas transfers of tax relieved UK pensions (30 October 2024)'.

State pension increases

In line with the so-called triple-lock, the State Pension will be increased by 4.1% in April 2025 (i.e. in line with the average increase in wages as the highest of the three parts that make up the triple lock). The Pension Credit Standard Minimum Guarantee will also increase by 4.1% from April 2025.

Mineworkers' Pension Scheme

The Investment Reserve Fund of the Mineworkers' Pension Scheme will be transferred to the scheme's Trustees. This will be paid out as an additional pension to members of the scheme. The Government will also take forward a review of the existing surplus sharing arrangements.

Workplace taxation and the National Living Wage

There will be no increase in the level of employee NICs, income tax or VAT.

Employer NICs will increase from 13.8% to 15%. In addition, the threshold for paying employer NICs will be reduced from £9,100 to £5,000. This is projected to raise £25 billion per year by the end of the forecast period.

Income tax thresholds will not be frozen beyond the current freeze, meaning that they will start to increase in line with inflation from April 2029.

The Government has mandated that the cost of living is taken into account by the Low Pay Commission when they set the level of the National Living Wage. This will increase by 6.7% to £12.21 in April 2025.

In addition, the Government is moving to a single adult rate, by moving to abolish the lower rates for 16-23 year olds. As a first stage, there will be large increases in current age-related rates in April 2025.

Overview of key macroeconomic and fiscal announcements

The Government's macroeconomic plans will be relevant for anyone making investment decisions, from trustees of DB and DC schemes to individuals saving in DC schemes. The broader economic climate is also relevant for the stability of the sponsors of DB schemes.

The Government's new Stability Rule

The key fiscal announcement was the confirmation of a new Stability Rule. Under the Stability Rule, government spending will be brought into balance by 2029/30 and, thereafter, in the third year of the cycle, so that day to day funding is in line with government receipts. The deficit is projected to fall from 4.5% of GDP to 2.1% of GDP by the end of the forecast period.

The Government's new Investment Rule

The Government's new Investment Rule will see government debt defined as "public sector net financial liabilities". As a result, there will be an additional £100 billion of capital spending over the next five years. The Office for Budget Responsibility state that this investment will drive growth over the next five years and increase GDP in the longer term by 1.4%.

The Government's macroeconomic focuses

The Government is focused on investment to try and increase UK economic growth. This will be done via policy and direct investment, with government taking advantage of the leeway introduced by the Investment Rule. The Government's key areas of focus to attempt to boost economic growth include:

  • increasing investment and new infrastructure;
  • working with the devolved governments to develop local growth plans;
  • creating Skills England to tackle local skills gaps in the labour force;
  • implementing the Government's Modern Industrial Strategy;
  • protecting government funding for research and development; and
  • key direct government investments in climate growth industries, e.g. carbon capture and storage and hydrogen.

For more information on any of the points covered here or to discuss any wider pensions-related issues for your business, please contact Ben Goldby and Ian Chapman-Curry.