Pension saving has long been one of the cornerstones of both retirement and tax planning.

However, a series of recent Budgets and policy shifts have created a more challenging landscape for those trying to put money aside for the future.

While none of the changes alone represent a complete overhaul of the pension tax system, together they amount to a noticeable squeeze on savers.

Pension tax allowances no longer stretch as far

The abolition of the Lifetime Allowance produced initial optimism among savers, but the replacement rules introduced since have added new limits and complexities, particularly around how tax-free lump sums are calculated.

Meanwhile, the Annual Allowance has not really kept pace with rising earnings for many workers.

While the standard allowance was increased to £60,000, Tapered Annual Allowances continue to restrict contributions for high earners, whose contributions can exceed the specified thresholds.

For those relying on pension saving to manage long-term wealth or mitigate the impact of frozen tax thresholds, these limits are increasingly becoming a constraint.

Upcoming changes to salary sacrifice reduce long-standing efficiencies

Salary sacrifice arrangements have been a useful way to manage taxable income while saving both Income Tax and National Insurance.

However, from April 2029, National Insurance relief on employee salary sacrifice contributions will be capped at the first £2,000 each year.

Although there is still time before these rules take effect, the change is a clear sign that one of the most widely used pension planning tools is becoming less advantageous.

In future, many individuals may need to rely more heavily on employer contributions or alternative investment strategies to achieve the same outcomes.

New IHT rules for unspent pensions from 2027

One of the most significant upcoming changes is the decision to bring unspent defined contribution pensions within the scope of Inheritance Tax from April 2027.

Under current rules, most unused pension pots can be passed to beneficiaries free of Inheritance Tax, making pensions an attractive estate planning tool as well as a retirement vehicle.

The new regime will alter this position considerably and it will mean that beneficiaries may face IHT charges where estates exceed the available allowances – especially as the IHT Nil-Rate Band and Residence Nil-Rate Band are frozen until April 2031.

Unfortunately, this means that pensions will no longer serve as a shelter from IHT to the same extent as before.

This marks a major shift in policy. Pensions will remain tax advantageous during life, albeit to a lesser extent, but their role as a tool for preserving family wealth is likely to diminish.

Individuals who had planned to draw more from other assets first, leaving pensions untouched to pass to relatives, may now need to reconsider this strategy.

These changes will draw more estates each year into the scope of IHT, placing greater emphasis on the need for comprehensive estate and retirement planning.

A more complex environment means planning ahead is essential

The combined effect of these measures is that saving into a pension is no longer as straightforward or tax efficient as it once was.

The core benefits remain, particularly the remaining tax relief available on contributions, but the system increasingly requires regular review and proactive tax planning.

Many individuals may now need to:

  • Reconsider the mix of pension contributions and other savings
  • Review employer contribution schemes
  • Maximise contributions while current rules still apply
  • Assess how the 2027 IHT changes may influence their wider estate strategy
  • Review whether pension drawdown should be brought forward rather than deferred

Keeping pension plans under review and adjusting them in light of policy changes is now an essential part of maintaining long-term financial wellbeing.

The coming years will require more active decision-making to ensure pensions remain a strong foundation for both retirement income and estate planning. For advice on the tax planning elements of pensions, please get in touch.

This article does not constitute independent advice on pensions and is intended to educate taxpayers on the considerations of retirement savings on their tax position.