For professional advisers only

With a seemingly endless stretch between Labour winning the election in the summer and last week’s Autumn Statement, there had been lots of speculation and rumours over what might be announced. Now the dust has settled, we look at the implications of the announcements for retirement planning.

Inclusion of pensions in Inheritance Tax (IHT)
One of the biggest changes announced by the Chancellor was that, from April 2027, unspent pensions will become part of the IHT calculation, with the aim to make the tax system fairer.

Currently, some defined benefit (DB) and defined contribution (DC) pension death benefits are distributed according to the deceased’s wishes without trustee discretion, meaning they are counted as part of their estate for IHT purposes. However, most pension schemes allow benefits to be paid out at the scheme’s discretion which can exclude them from that person’s estate.

Additionally, under the new rules, if someone dies after the age of 75 then their undrawn pension funds could face both IHT and income tax (unless transferred between spouses), significantly impacting the overall inheritance value and resulting in a dual tax burden: 64% if both IHT (40%) and income tax at a higher rate (40%) apply, or 52% when combined with the basic income tax rate (20%).For people in Scotland, the income tax will be applied at their marginal rate.

How does this affect retirement planning?
Traditionally, retirees have used pensions as an IHT-free asset to pass on to their beneficiaries, often spending other investment assets (such as ISAs) first.

This change is likely to alter this approach, encouraging some retirees to start drawing income from their pensions earlier. As a result, an increase in demand for financial advice is expected. Many individuals will need to re-evaluate their retirement and estate planning strategies, particularly those already in retirement who rely on drawing from assets beyond their pensions.

They may also have to factor in the implications of dual taxation if they die after the age of 75, again highlighting the importance having a financial plan in place to manage any tax liabilities effectively.

State pension increase
The state pension is set to increase by 4.1% from April 2025, which will bring the full new state pension up to £12,014.12 annually.

How does this affect retirement planning?
This amount is now closely aligned with the Personal Allowance for income tax (currently £12,570 annually). As a result, retirees will require only a modest additional income before they begin to incur income tax liabilities, highlighting the importance of careful income planning for those relying on both the state pension and additional income sources in retirement.

Increase in employer National Insurance (NI)
A large chunk of the £40 billion that the government aims to raise annually will primarily come from changes to employer NI contributions, which will rise to 15%, alongside a lowered earnings threshold for NI contributions from £9,100 to £5,000 for employees. These adjustments are projected to generate around £25 billion per year by the end of the forecast period.

How does this affect retirement planning?
The increase makes salary sacrifice arrangements for pension contributions even more attractive. With these changes, salary sacrifice becomes even more of an appealing option, offering not only tax savings for employees, but allowing employers cut down on their NI contributions. It makes salary sacrifice a very attractive strategy for businesses looking to manage payroll costs while also being beneficial to employees.

The Autumn Statement has delivered some welcome clarity after weeks of speculation and rumours. While important decisions lie ahead for many people, particularly around inheritance tax (IHT) and pension planning, pensions remain key to retirement strategies and provide the cornerstone of ensuring long-term financial stability and resilience in retirement.

Please remember that the value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future.