The October 2024 Budget has ushered in several notable changes, reshaping the landscape for UK pensions and impacting both wealth managers and financial advice firms. From new inheritance tax (IHT) implications to changes in employer costs, the announcements made will likely affect the strategies of those both building up and drawing down on pension savings. Below, we dive into the specifics of the key changes, their potential impact on clients, and why accessing expert financial advice has never been more crucial.

Key Budget Announcements Affecting Retirement Planning

1. Inheritance Tax Changes for Pension Funds and Death Benefits

Starting 6th April 2027, unused pension funds will be included in a person’s estate for IHT purposes. For defined contribution (DC) pensions, this means any funds remaining at the time of death could face IHT. The government’s stated intent is to prevent pensions from becoming a tax-efficient vehicle for passing on wealth, which has been a rising trend since the 2015 pension reforms. While defined benefit (DB) pensions seem mostly unaffected, there are still open questions about which lump-sum death benefits will fall under this rule.

2. Increased Employer NICs

From April 2025, the employer NICs rate will rise by 1.2% to 15%, and the threshold for paying NICs will drop from £9,100 to £5,000. While these changes will raise operational costs for employers, the silver lining is that employer pension contributions will remain NIC-free, and salary sacrifice arrangements continue to be available. This offers a continued compelling option to manage NICs through thoughtful pension planning.

3. National Living Wage Increase

Effective April 2025, the National Living Wage (NLW) will rise by 6.7%, reaching £12.21 per hour. This will boost income for many, but also increase wage and pension contribution obligations for employers. The result? Potentially higher pension pots for low-wage earners, but at a cost that employers will need to manage carefully. The rise will also see some individuals who were previously non-tax payers becoming tax payers in the new tax year.

4. State Pension Triple Lock Maintained

Great news for state pension recipients: the triple lock will remain in place for the rest of this parliamentary term. The basic and new state pensions will rise by 4.1% in April 2025, keeping pace with earnings growth. This stability offers certainty, though it also nudges up public spending commitments and much like the increase in NLW, when combined with other income, will likely see individuals inevitably paying more tax.

5. Tax Free Cash Remains Untouched 

Despite speculation, there were no changes to the 25% tax-free lump sum for DC pension holders. This piece of pension gold remains intact, allowing retirees to access a quarter of their pot tax-free—a consistent perk that continues to support tax-efficient retirement planning.

Implications for Those Building Pension Savings

For individuals in the accumulation phase, this budget underscores the importance of building a retirement strategy that remains flexible, tax-efficient, and resilient to policy shifts. The IHT changes to pension death benefits could prompt a reconsideration of how savings are allocated:

• Inheritance Tax Planning: With the inclusion of DC pension savings in IHT calculations post-2027, it may become advantageous for wealth managers to advise clients to consider alternative vehicles for legacy planning. Using ISAs, trusts, or certain life policies may help to optimise tax efficiency while reducing potential IHT liabilities on pension funds.

• Employer Contributions as a Strategy: The continued NIC-free status of employer pension contributions makes them an even more appealing component of retirement planning. For clients using salary sacrifice schemes, this remains a valuable approach to maximise pension contributions and reduce NICs. The upcoming NIC increase may drive more businesses and employees to review these schemes with their advisers.

• Increased Minimum Wage & Pension Contributions: For younger, lower-income earners, the rise in the NLW means a larger percentage of earnings will go into workplace pensions. Although this boosts retirement savings, it also heightens the importance of ongoing financial education, as these individuals may need to understand the compounding benefits of early contributions.

Implications for Those Accessing Pension Savings

For retirees or those nearing retirement, the budget changes call for a re-evaluation of how to best access and allocate pension savings in light of the budget changes.

• Flexibility in Withdrawal Strategies: With DC pension funds now potentially subject to IHT, retirees may wish to (following a detailed analysis from their adviser) consider withdrawing from these pots, either to live off directly or to reinvest in IHT friendly solutions for them or their heirs. This could reduce the tax burden on any remaining estate. Financial advisers will need to consider tailored strategies to balance tax efficiency with retirement income needs.

• Legacy Planning Adjustments: Clients looking to leave a tax-efficient legacy may need new solutions. For example, where pensions once offered a simple route to pass wealth to the next generation tax-free, now life policies or alternative investment structures might be preferable. Ensuring clients understand and act on these shifts will be crucial. Taking early action, through maximising allowances and Income Tax bands will be important.

• Tax Free Cash as a Strategic Tool: With the tax-free lump sum untouched, clients nearing retirement still have a valuable tool for funding retirement while avoiding a tax hit. This budget confirmation allows advisers to recommend these lump sums with confidence, supporting diversified income sources for clients. The strategic nature of tax free cash will also be even more relevant to people as they approach 75, with real consideration needing to be given to taking the tax free cash – irrespective of immediate need – to avoid the potential double taxation on death of IHT and the Income Tax due on the amount in the hands of the beneficiaries.

Why Financial Advice Is More Essential Than Ever

This year’s budget has introduced new layers of complexity for retirement planning, especially for clients focused on long-term wealth preservation and tax-efficient IHT planning. Financial advice has always been valuable, but these changes elevate it to an essential service for individuals looking to adapt to shifting policies and make the most of their pensions.

For wealth managers, this presents an opportunity to reinforce the importance of professional guidance. Crafting bespoke strategies, assessing risk, and implementing forward-looking tax planning are all areas where financial advisers will prove indispensable. And with the government set on reshaping the tax advantages around pensions, staying agile in retirement planning will require ongoing reviews and adjustments.

A Call to Action for Savvy Retirement Planning

The October 2024 budget introduces new challenges and opportunities for pension holders. For clients both in the accumulation and decumulation phases, there is an increased urgency to work with financial advisers who can navigate the nuanced changes to IHT, employer contributions, and state benefits. Now more than ever, it’s essential for your clients to get the expert guidance that ensures their pension plans remain both tax-efficient and tailored to their evolving financial goals.

As the government continues to refine the rules around pensions, it’s not just about accumulating wealth; it’s about doing so wisely and with an eye on the future. With the right advice, your clients can still make the most of their pensions, even as the rules shift beneath them.

Get in Touch

These are some initial high level thoughts, and naturally, any planning strategy should be personalised to meet each client’s unique needs. If you’d like to explore how Adeptli can support you in adapting client strategies to navigate the evolving legislative landscape, or how you may wish to alter your proposition and processes post budget, please don’t hesitate to reach out. You can contact us via email at hello@adeptli.co.uk or book a meeting with me.

Up Next: Why not read our blog Budget 2024: Impacts on Advice and Investment Strategies

Author: Jamie Ponting