Pensioners are being urged to review their retirement finances ahead of significant tax changes taking effect from April 2027, including new rules affecting State Pension income and inherited pensions. The changes follow the Autumn Budget and could affect income tax liabilities and inheritance tax planning.
State Pension income tax protection confirmed
Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, has outlined several important changes following the Autumn Budget, alongside practical steps older people can take to protect their retirement savings and potentially reduce future inheritance tax bills.
The full New State Pension will rise to £13,036.40 annually from April 2027, exceeding the frozen £12,570 Personal Allowance by £466.40. Under the Autumn Budget measures, eligible pensioners will receive additional tax protection, with the allowance gradually withdrawn as total income increases.
Ms Morrissey welcomed the potential relief for pensioners concerned about paying income tax on their State Pension but raised concerns about the additional complexity. She wrote: "It might come as a sigh of relief for those worried about a squeeze on incomes and having to fill out more assessment forms, but it does run the risk of making a complex system even more complicated."
The additional allowance is due to operate from April 2027 until April 5, 2030, although further details about its practical operation are still awaited.
Inheritance tax changes on pension funds
Ms Morrissey also highlighted the decision to bring unused defined contribution pension funds into the scope of inheritance tax from April 2027. Under existing rules, pension savings can generally be passed to beneficiaries without inheritance tax being charged on the pension fund itself.
However, the changes mean unused pension savings and certain death benefits will be included when calculating the value of a deceased person's estate. Ms Morrissey warned that this could result in more families facing inheritance tax and change the way people plan to use their retirement savings.
The standard inheritance tax threshold is £325,000, with an additional residence allowance of up to £175,000 available where a qualifying home is passed to direct descendants. Married couples and civil partners may also be able to transfer unused allowances, potentially allowing up to £1 million to pass without inheritance tax, depending on their circumstances.
Check for lost pensions and consider gifting
One of Ms Morrissey's recommendations is to check whether any pension savings have been forgotten, particularly from previous employment. She highlighted that lost pension pots could leave substantial gaps in retirement planning and encouraged people to use the free Pension Tracing Service, which helps locate contact details for former workplace or personal pension providers.
Once pensions have been traced, savers can assess their overall retirement finances and consider whether consolidation would be appropriate. However, Ms Morrissey cautioned against transferring pensions without checking for exit fees or valuable benefits, including guaranteed annuity rates.
Ms Morrissey also outlined several ways families could potentially reduce future inheritance tax liabilities through gifting. The annual gifting exemption allows individuals to give away £3,000 each tax year without the amount being added to their estate for inheritance tax purposes. Larger gifts may also fall outside the estate if the person making them survives for seven years, subject to the relevant rules.
Another option involves making regular gifts from surplus income, provided they are affordable, come from income rather than capital and do not affect the person's usual standard of living. Ms Morrissey stressed the importance of maintaining accurate records of gifts and ensuring that retirement income remains sufficient to meet future living costs. She also highlighted that people should consider financial advice where inheritance tax planning becomes complicated.
Salary sacrifice changes from 2029
Another change outlined by Hargreaves Lansdown concerns salary sacrifice pension contributions. From April 2029, National Insurance relief on employee pension contributions made through salary sacrifice will be restricted to the first £2,000 annually.
The change could reduce the National Insurance savings available to workers making larger contributions, although pension contributions will continue to benefit from income tax relief under the applicable rules. Ms Morrissey added that workers still have time to review their arrangements before the change takes effect.
