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The new Government has already made its mark by announcing major changes to pensions, and there could be much more to come.
Before the election, Chancellor Rachel Reeves promised a major overhaul of the pension system, which is already underway and could be radical if the challenge of reforming pension tax relief is taken up.
A raid on the wealthiest pension savers could raise billions of pounds for other government spending priorities, but the obstacles are so enormous that Reeves might well think better of the idea, like his Conservative predecessors.
Meanwhile, the Government has promised to respect the triple lock on state pensions when it comes to annual increases, with next year’s headline rate rise to £11,960 taking place in the spring.
A decision on the next increase in the state pension age to 68 is overdue after the last Government reviewed the timing but wavered on its verdict.
Reeves could employ similar delaying tactics, especially since voters will be quite unhappy when the increase in the age to 67 goes into effect between 2026 and 2028.
Chancellor Rachel Reeves: Before the election she promised a major pension review, which is now underway
The minimum age to access work and other private pensions will also rise, from 55 to 57 years, but not until April 2028.
This year, the shock move to impose an inheritance tax on pensions will continue to resonate as wealthy families look to protect their wealth ahead of the change in just over two years.
Below we delve into that and other big problems facing pension savers and retirees. Here’s what you need to know in 2025.
1. Inherited pensions: Shock and blow of ‘double taxation’ of up to 70.5%
The Government’s plan to make pensions subject to inheritance tax like other assets such as property, savings and investments raised many questions from readers following the announcement in the Budget.
The change won’t come until April 2027, but many people who have used pensions as an estate planning tool will want to review existing arrangements well in advance.
Some are looking to collect as much of their pensions as possible while avoiding a large income tax bill, or to donate excess income that remains free of inheritance tax as long as they can afford it.
Others are deciding whether to leave more or all of their estate to their spouses – who can still benefit from inheritance tax-free inheritances – rather than their children to delay and minimize the final bill.
Since the pension freedom reforms in 2015, the taxman treats retirement funds generously when people die, especially if it is before age 75, when they are tax-free.
We have a full summary of how legacy pensions are currently taxed here, because this is still relevant for the next two or so years, and see the chart below for new mitigation strategies going forward.
The Government says it is “removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning” by bringing unspent funds into the scope of inheritance tax.
However, financial experts warn that their plans mean the richest families, where recipients pay the highest rate of income tax, face a “double tax” of up to 70.5 per cent.
Meanwhile, discretionary death benefits will also be added to estates for inheritance tax purposes from April 2027.
Steve Webb, former pensions minister and This is Money retirement columnist, believes these changes could lead to “massive bureaucracy and delays for grieving families”.
Webb, who is now a partner at LCP, says: “People will need to know which pension schemes to contact, they will need to rely on efficient pension administration (with the whole process on hold until the slower scheme has responded) and then potentially wait months more before the plan can release death benefits and pension balances.
2. State pension top-ups: the deadline for the special agreement ends in April
Once again we are approaching a deadline to buy refills that dates back to 2006, instead of the usual six years.
Savers have until April 5 to take advantage of this concession, unless it is delayed for a third time.
Buying top-ups can give a generous boost to retirement income if you buy the right years on your record.
And in early 2023, the limited-time deal to fill much earlier gaps proved so popular that there was a huge rush to beat that year’s April deadline.
The buyers blocked the phone lines and overwhelmed the system. The crisis ultimately forced the Government to extend the deadline twice, first until mid-summer and then when demand did not ease until comfortably after the next election in spring 2025.
The chaos didn’t end there because there was a huge backlog of payments to process, and This is Money readers contacted us en masse over the next year to complain about long delays, lost cash, and government staff providing incorrect information or being unable to help.
We will have to see if the Government is better prepared and can prevent a repeat of the debacle before the April deadline.
State pension top-ups: There is a decisive deadline in April to cover deficits dating back to 2006, instead of the usual six years.
There is hope that it can, because a new online tool was launched in 2023 to help people buy refills more easily and since then we have received far fewer messages from unhappy readers.
Thar said we will soon publish a story on three failed cases, including one involving a 71-year-old whose money disappeared in February 2023, but who had not yet received a pension increase until we intervened.
The scheme also continues to be administered jointly by HMRC and the Department for Work and Pensions.
HMRC is responsible for maintaining National Insurance records, which you must check for gaps in your state pension records, and for processing top-up payments. The DWP is responsible for reviewing state pension forecasts or payments after purchases.
If money is lost, it is difficult to know when it happened and therefore which department to go to. Readers constantly tell us how they are made to go around in circles and never find any staff willing to help solve the problem.
When we were investigating cases of this type for our last article, we asked whether HMRC or DWP or both plan to assign additional staff to deal with top-ups in the run-up to the April deadline, and whether they intend to work more closely together to Payments are processed efficiently and are not lost to each other.
A Government spokesperson says: “There is still time to make voluntary contributions before the deadline of April 5, 2025.” We encourage people to act now.
‘HMRC and DWP will continue to work closely and will always prioritize resources as necessary to manage peaks in demand, particularly for upcoming deadlines.
“When errors occur, we promise to resolve them as soon as possible.”
Do you want to buy refills or just see if it’s worth doing so in your own circumstances? Use the Online recharge service here or the HMRC application.
This is Money’s guide to buying state pension top-ups and it has some golden rules for deciding whether you should fill the gaps. If you paid and haven’t heard anything else, please contact us at pensionquestions@thisismoney.co.uk.
Unfortunately we can’t help everyone, so you can also contact your MP. If you are an expat, you can contact the MP of the last constituency you lived in and still ask for help. Find your deputy here.
Multi-party politics: The last Chancellor Jeremy Hunt and his successor Rachel Reeves are interested in using citizens’ pension savings to boost the stock market and economic growth.
3. Mega pension funds: use our retirement savings to boost the economy
Workers in small private plans or councils will see their savings transferred to new pension “mega funds” in the coming years, Chancellor Rachel Reeves has announced.
Forced mergers aim to create funds with the scale to invest in a broader range of riskier, but potentially higher-yielding assets.
The Government’s move builds on its predecessor’s idea of using people’s pension savings to boost the stock market and the UK economy.
Former Chancellor Jeremy Hunt persuaded major pension firms to say they would allocate 5 per cent of their “default” Labor funds to unlisted shares, in a voluntary “Mansion House Pact”.
Reeves’ plan involves the mandatory consolidation of defined contribution schemes below a certain size and the pooling of assets from the 86 separate Local Government Pension Scheme authorities.
She says the resulting pension ‘mega funds’ will unlock £80 billion of investment in exciting new businesses, infrastructure and local projects, while boosting retirement savings and driving economic growth to improve the lot of people. people.
Research shows their aim has broad public support: 57 per cent of people want their pension to include a higher percentage of shares in UK companies, although 42 per cent said this was on the condition that would not affect investment returns.
Meanwhile, 54 per cent want their pensions to be invested more in private assets such as housing schemes, infrastructure projects and early-stage growth companies.
Abrdn’s survey of 3,000 people, weighted to be nationally representative, found that 14 percent did not want this and 32 percent were unsure.
A poll of This is Money readers suggested much greater scepticism: 66 per cent wanted their pension to be invested solely for the best returns.
About 21 percent said they supported using pensions to boost economic growth, as long as it does not reduce their returns.
The public debate will intensify next year, when the Government holds a consultation and then introduces its reforms into a pending pension schemes bill.
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