Most of the anticipated changes for pensions were not announced, although there are still matters for trustees, employers, and members of pension schemes, to be aware of.
Unused pension funds and (most) death benefits to come within the scope of inheritance tax (IHT)
While there had been speculation about changes to the taxation of pension death benefits ahead of the Budget, the Chancellor has gone further than many people expected.
From 6 April 2027, unused pension funds and most death benefits will be included within the value of a person’s estate for IHT purposes. This is a significant change from the current regime where beneficiaries can avoid inheritance tax through the discretion that trustees/managers of registered pension schemes apply when distributing death benefits.
There are only limited death benefits that will be excluded from this measure, with dependents’ scheme pensions being the main exception. The existing overriding IHT exemption for transfers between spouses and civil partners on death will also continue to apply.
It is currently unclear how benefits from stand-alone group life assurance schemes (being registered pension schemes) will be treated by this new measure. The ‘defined benefits lump sum death benefit’ – usually paid as a lump sum based on a multiple of salary on the death of a member while they are an employee and usually provided via an insurance policy funded by the employer – is included in the list of authorised pension death benefits in the technical consultation document published on the day of the Budget. (Excepted group life assurance schemes are not registered pension schemes and, therefore, do not appear to be covered by this change.)
The government will be requiring “pension scheme administrators” (commonly the trustees or managers) to report and pay any IHT liability due on unused pension funds and death benefits to HMRC before paying out the benefit to the beneficiaries. This will involve another set of onerous requirements on pension schemes and will be very challenging to implement within the timescales envisaged.
A consultation1 has been published on the government’s proposed (very detailed) reporting and payment requirements, which runs until 22 January 2025.
Employer National Insurance contributions (NICs) to rise
As far as NICs are concerned, the headline news was a substantial 1.2% increase in the employer rate from 6 April 2025 (to 15%) and a reduction in the threshold at which employers become liable to pay NICs from £9,100 to £5,000 per year.
While this was presented as a tax on employers, it is inevitable that a significant proportion of this will be passed on to employees and consumers.
One area of concern ahead of the Budget was the possibility of the scope for employer NICs being extended to also apply to employers’ pension contributions. Such a move could have made salary sacrifice (or exchange) arrangements for making pension contributions less attractive. This change was not announced.
State pension triple lock to continue
As expected from Labour’s election manifesto, the government will maintain the triple lock for both the basic state pension and the new state pension “for the duration of this parliament”. This will see state pensions increase by 4.1% from April 2025.
Transfers to pension schemes in the EEA and Gibraltar
Transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) are subject to a 25% tax charge unless a particular exemption applies to the transfer. Since April 2024, when the lump sum allowance and lump sum and death benefits allowance were introduced, a separate overseas transfer allowance has applied to pension benefits transferred to QROPS.
The previous exemption from the tax charge, for transfers to QROPS within the European Economic Area (EEA) or Gibraltar, has been removed “to address the risk of individuals receiving double tax-free allowances” (i.e. transferring partial pension savings to a QROPS and potentially receiving tax-free lump sums from pension schemes in both the UK and overseas).
In addition, the government will bring into line the underlying conditions that QROPS within the EEA must meet with those for schemes established in the rest of the world from 6 April 2025.
As a result of these changes, the government will require pension scheme administrators of registered pension schemes to be UK resident with effect from 6 April 2026. (Currently, they must be resident in the UK, an EU member state, or an EEA state which is not a member of the EU (i.e. Norway, Iceland or Liechtenstein).)
Comment
Budget announcements are rarely concerned with promoting pension saving, but some of the rumoured changes ahead of the Chancellor’s speech - such as restricting pension commencement lump sums and changing the basis of tax relief for member contributions – would have likely had a negative impact on pension saving. As such, the fact that such measures have not been taken forward should be welcomed.
The headline issue for pension schemes is the announcement of unused pension funds and (most) death benefits coming within the scope of IHT from April 2027. This is clearly a measure designed to raise tax revenues, albeit only a small number of estates are likely to trigger an IHT liability by including pension savings.
While the focus for pension savings being “for their intended purpose of funding retirement”, rather than “a tax planning tool to transfer wealth without an inheritance tax charge” after death, is understandable from a Treasury perspective, the reason given in the consultation document – ensuring consistency with the very small number of schemes that do not provide for the discretionary distribution of benefits on death - seems far-fetched.
In addition, the government’s proposal for pension schemes to take responsibility for the reporting and payment of any IHT liability in respect of death benefits, echoes the initial moves for a similar regime to apply in respect of the taxation of benefits above the lump sum and death benefits allowance introduced in April 2024. That was successfully rebuffed by the industry ahead of its introduction, and it is expected that similar objections will be raised about these latest proposals.
As the detail becomes clearer, trustees and employers will want to carefully consider how best to communicate any changes to their members, and whether to make any changes to scheme design.
The biggest short-term focus for employers is likely to be dealing with the impact of the increase in employer NICs. Ironically, after all the speculation before the Budget that there would be changes to pensions tax relief, this increase will make salary sacrifice (or exchange) arrangements, and other tax efficient benefit options, even more attractive to employers to offset some of the impact of the increase.
Inevitably, rising employment costs mean the cost of attracting and retaining great talent is increasing for employers. Pay compression is creating tighter pay structures as living wage increases reshape traditional salary bands. With salary review season upon us, employees may have high expectations fuelled by a recovering economy - yet employers will be equally cautious about the pressures on pay budgets. This may necessitate a review of how companies reward their employees meaningfully and motivate them to help achieve business goals.
Gallagher’s Knowledge Resource Centre
The Knowledge Resource Centre is responsible for knowledge management, analysis and publications, research and training, primarily for Gallagher’s Retirement and Pensions practice. For more information, please contact your consultant or call us on 0800 066 5433.
