Are pensions still valuable following the budget?

Prefer to listen? Hit the play button above to listen to the audio update version of this article!

The budget back in October 2024 certainly brought with it some significant changes, not least to pensions and the future inheritance tax position of them.

From 6 April 2027, the value of a pension will be considered within an individual’s estate for inheritance tax calculations, and where this pushes someone over the nil rate band, a tax charge equal to 40% of any excess will be due. For married couples, this will only be the case on the second person’s death, as pensions can pass across to a spouse free of inheritance tax.

This significantly changes the pension landscape and how you might view your pension in later life, but does it make pensions any less attractive as saving vehicles for those individuals working today, and saving money for their retirement?

The simple answer for most people is no!

Why? Because the government hasn’t made any changes to the tax relief an individual can receive on the contributions they make! So, putting money into a pension still has tax saving benefits. Let’s look at how this works….

David earns £100,000 per year. A total of £60,000 (including tax relief received) per year can be contributed into his pension fund (from both him personally and his employer) in this current, 2024-25 tax year. If he makes a total personal contribution of £48,000 into his pension, he will receive an immediate tax relief uplift of £12,000 (20%) inside the pension. In addition, he will also be able to reclaim an extra 20% tax relief on part of the contribution via his self-assessment tax return. This equates to a further £9,946 (due to him being a higher rate tax payer). The total pension contribution of £60,000 has, in this scenario, actually only cost David £38,054.

Let's now look at a scenario where David earned more money per year. Taking home a salary of £125,140 would mean that he had fully lost his personal tax free allowance of £12,570. This allowance starts to be tapered away on earnings over £100,000, in fact. The relative rate of tax on earnings between £100,000 and £125,140 is therefore 60%. If David made a personal contribution of £20,112 to bring his total earnings back to £100,000 then he would receive £5,028 of tax relief in his pension and in addition, receive relief of £10,056 in his back pocket via his self-assessment tax return. By making this pension contribution David has saved himself £10,056 in income tax on his total earnings during the tax year and in addition, has received tax relief of £5,028 in his pension. The total pension contribution of £25,140 has actually only cost David £10,056! If you’re earning more than £100,000, please contact us about how you can reduce your income tax liability.

And don’t forget, there’s not just the benefit of tax relief to consider. Growth of those investments inside your pension is tax free, too. Over the years, the positive impact of tax free compounding growth can make a significant difference to the total returns you receive.

But what about people in retirement, is it still beneficial having your money within a pension after 6 April 2027?

This very much depends on an individual’s personal circumstances, but if your total estate value (including your pensions) is under the nil rate band of £325,000 (plus an additional £175,000 if you own your home and intend to leave it to your children on death/death of your spouse), then inheritance tax won’t be due anyway! So, pensions offer no inheritance tax (IHT) disadvantages.

But, if this isn’t the case and your pension fund will in fact incur a 40% IHT charge, then it may be advantageous to consider the levels of income you draw and what you could do with your pension now to help improve your overall IHT position, as leaving it in your pension fund will become a less appealing option.

So in summary, pensions are still a very tax efficient savings vehicle, and for most people will be the most advantageous place to save for retirement. However, with the pension landscape changing in 2027, it’s important that people seek advice to ensure they’re maximising the right savings vehicles, or utilising the right investments for income in retirement.