What the next Budget might mean for pensions, and why they’re still a tax-efficient option

This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.

With autumn fully upon us, we have an unusually late Budget looming on the horizon.

It is well known that the chancellor, Rachel Reeves, has a difficult job on her hands, with a reported £51 billion “black hole” in the public finances to address. With the current government’s pledge not to raise Income Tax, Reeves needs to come up with other ways to find the money.

Unsurprisingly, the old “political football” of pensions has started to make its annual appearance in the press as a way of raising funds. It has been well-documented in the industry press recently that the rumours are having a real impact on client behaviour, with Money Marketing noting that clients are taking “irreversible action” as a result.

In the 2024 Budget, we learned that, from April 2027, defined contribution (DC) arrangements such as SIPPs will fall into the scope of Inheritance Tax (IHT). More on that later.

With the changes to IHT in mind, and the usual rumours that pensions are going to be in the chancellor’s sights in the Budget, there has been some noise about whether pensions are as attractive as they once were.

Today, we’re going to look at some of the main pension talking points ahead of the Budget. Then, we’ll balance that with a gentle reminder of the significant benefits pensions can play in a client’s overall financial plan.

The Budget rumours, summarised

While we do not wish to add to speculation as to what will or will not be announced in the Budget, we are regularly speaking with advisers about what their clients are reading. As we are sure advisers are pointing out to their clients, we have been in this position many times before, only to be in the same position post-Budget.

Here are the three main topics we are currently discussing with advisers.

1. A reduction in the pension commencement lump sum

A cornerstone of the payment of benefits from DC arrangements such as SIPPs is the ability to withdraw up to 25% of the pension value tax-free, an amount previously known as “tax-free cash”.

The change in name from “tax-free cash” to “pension commencement lump sum” (PCLS) led some people to suggest that it was a matter of time before tax will be applied to this payment.

In theory, this was always set as an upper limit of 25% of the Lifetime Allowance (LTA) at the point benefits were crystallised. While the LTA was removed in 2024, we now have the Lump Sum Allowance to consider when testing the maximum amount of tax-free benefit someone can withdraw. In 2025/26, this is set at £268,275.

The PCLS has remained an integral part of most people’s retirement planning. But every year the government needs to raise funds, the “low hanging fruit” of the PCLS seems to be touted in the media as one way of raising public finances.

However, we have been here many times before and yet the 25% figure remains, albeit with an upper limit that would not affect most clients.

2. Pension contribution tax relief

Another cornerstone of pensions is the tax relief on all contributions made, up to certain limits.

Contributions made personally benefit from tax relief at an individual’s highest marginal rate of Income Tax, with 20% being reclaimed by the pension provider. Any higher- or additional-rate tax relief is reclaimed personally via HMRC. Employer contributions – when made on behalf of an individual – are deductible for Corporation Tax purposes.

In July, PensionsAge reported that pension contribution tax relief cost the Treasury £78.2 billion in 2023/24, an increase of over £6 billion from the previous 12 months. These figures are likely to attract attention when the government is looking to raise funds.

To date, we have not seen anything to suggest that tax relief will be removed from pension contributions. However, it is not unusual to hear comments around flat rate tax relief this time of year. Rather than the tiered system of tax relief at an individual’s highest tax rate, flat amounts of 25% to 30% have been quoted in the past.

3. SIPPs and Inheritance Tax

OK – while we admit this was the big news from the last Budget, we are including it here as it is still a topic on advisers’ and clients’ minds.

There had been some hope of a U-turn on the announcement to bring pensions into the scope of IHT. A consultation period was open from the Budget to January 2025 for pension professionals to give their feedback on the proposals. As you would expect, most respondents were against the changes.

However, the government announced earlier this summer that it was pushing on with its plans. In fact, as highlighted by Money Marketing, HMRC only made tweaks to the processes as a result of the consultation period, rather than taking a different approach.

With over 18 months until the proposals come into force, there is still time for changes to be made. However, there has been no suggestion from the government that this will be the case, and advisers are now reviewing their clients’ financial plans with these new rules in mind.

A timely reminder about the benefits of pensions

Sometimes, with all the noise around pensions, the tax benefits of pension wrappers can be forgotten. To balance out the Budget rumours, here are three areas where pensions can benefit clients.

1. Tax relief on contributions

Yes, we know we’ve just mentioned this as a Budget rumour.

But it’s still worth highlighting the incentive that tax relief offers for people to contribute to pension schemes, which is tough to match in other savings vehicles.

• People below the age of 75 can contribute up to the Annual Allowance (£60,000 in 2025/26) or 100% of their earnings, whichever is lower, and receive tax relief at their marginal rate of Income Tax.
• A pension provider will automatically claim 20% tax relief on the amount contributed.
• Higher- (40%) and additional-rate (45%) taxpayers can claim additional tax relief via self-assessment or an amendment to their tax code.
• Contributions made by an employer do not attract Corporation Tax, and no National Insurance is due for either employees or the employer. That makes them a tax-efficient way for companies to provide employee benefits.
• In some instances, it is possible to carry forward unused Annual Allowance from previous tax years.

For a higher-rate taxpayer, paying £16,000 into a pension scheme would see the pension provider reclaim £4,000 on an individual’s behalf in tax relief, making a gross pension contribution of £20,000. That individual would then be able to reclaim further tax relief of £4,000 on the higher rate of tax they pay, meaning that a gross contribution of £20,000 has effectively cost the client £12,000.

This tax relief calculator is handy for working out what someone could potentially be due.

2. No Capital Gains Tax

Every individual has an annual exemption for tax-free profit before Capital Gains Tax (CGT) is charged. For 2025/26, this is £3,000, and only gains over this amount are taxable, typically at 18% and 24% (or up to 32% in some cases), depending on an individual’s taxable income and the type of asset.

When a gain that exceeds the annual tax-free exemption is realised personally – disposing of an investment, for example – CGT will usually be payable.

However, when these investments are held in certain wrappers, including ISAs and pensions, there is no CGT to pay, regardless of the value of the gain.

When it comes to the value of benefits that can be built up in a pension, and the length of time these investments are typically held for, this CGT exemption can prove to be very beneficial to clients. For example, IPM owns over 1,200 commercial properties on behalf of our clients. Where a property is held for 20 years or more, this could lead to significant savings.

3. No Income Tax

Any income generated by assets held in a pension scheme is not subject to Income Tax. This includes dividends and – coming back to the commercial property angle – any rental income received.

Taking this a step further, if the client’s company is the tenant of the property, then this rent is usually considered a business expense and therefore does not attract Corporation Tax. It is then received into the SIPP tax-free and can be re-invested. Finally, as referenced above, there’s no CGT applicable when it comes to disposing of that investment.

And finally…

There is no crystal ball here. None of us will know if any of the rumours have foundation until Budget day.

However, if we can offer a glimmer of hope, Citywire reported the pension minister, Torsten Bell, as saying at the Labour Party conference:

“It is important that our tax relief system provides strong incentives for people to save.”

Get in touch

If you have any SIPP-related queries, or if you have any clients for whom SIPP advice would be beneficial, please get in touch.

Email info@ipm-pensions.co.uk or call 01438 747151.