The new Government has already made its mark by announcing significant pension changes, and there could be much more to come.
Before the election, Chancellor Rachel Reeves promised a major review of the pension system, which is now underway and could be seismic if it takes on the challenge of reforming pension tax relief.
A raid on better off pension savers could raise billions of pounds for other Government spending priorities, but the obstacles are so daunting that Reeves may well think better of the idea, just like her Tory predecessors.
Meanwhile, the Government has promised to honour the state pension triple lock when it comes to annual rises, and next year’s hike in the headline rate to £11,960 will go ahead in the spring.
A decision on the next rise in the state pension age to 68 is overdue after the last Government reviewed the timing, but dithered over its verdict.
Reeves might employ similar delaying tactics, especially as voters will be unhappy enough when the age rise to 67 gets under way between 2026 and 2028.
Chancellor Rachel Reeves: Before the election she promised a major review of pensions, which is now under way
The minimum age to access work and other private pensions will also go up, from 55 to 57, but not until April 2028.
This year, the shock move to slap inheritance tax on pensions will continue to reverberate as affluent families seek to protect their estates before the change in just over two years’ time.
We delve into that and other big issues facing pension savers and retirees below. Here’s what you need to know in 2025.
1. Inherited pensions: Upheaval and ‘double tax’ hit of up to 70.5%
The Government’s plan to make pensions liable for inheritance tax like other assets such as property, savings and investments prompted many questions from readers following the announcement in the Budget.
The change doesn’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 cash in as much of their pensions as possible while avoiding a big income tax bill, or gift out of surplus income which remains inheritance tax free providing you can afford it.
Others are deciding whether to leave more or all of their estate to spouses – who can still benefit from estates free of inheritance tax – instead of their children to delay and minimise the eventual bill.
Since the pension freedom reforms in 2015, retirement pots are treated generously by the taxman when people die, especially if that is before age 75 when they are tax free.
We have a full rundown on how inherited pensions are taxed at present here, because this remains relevant for the next two and a bit years, and see the box below for the 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 pots into the scope of inheritance tax.
However, financial experts warn its plans mean the richest families, where beneficiaries pay the highest rate of income tax, face a ‘double tax’ hit of up to 70.5 per cent.
Meanwhile, discretionary death benefits are also going to be brought into estates for inheritance tax purposes from April 2027.
Steve Webb, former Pensions Minister and This is Money’s 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, will have to rely on the efficient administration of pensions – with the whole process on hold until the slowest scheme has replied – and then potentially wait months more before death benefits and pension balances can be released by the scheme.’
2. State pension top-ups: Deadline on special deal ends in April
A crunch deadline to buy top-ups going back to 2006, rather than just the usual six years, is approaching once again.
Savers have until 5 April to take advantage of this concession – unless it is pushed back for a third time.
Buying top-ups can give a generous boost to retirement income if you buy the correct years on your record.
And in early 2023, the time-limited deal to fill in much earlier gaps proved so popular that there was a massive rush to beat that year’s April deadline.
Buyers jammed phonelines and overwhelmed the system. The meltdown ultimately forced the Government to extend the cut-off date twice, first to midsummer and then when demand didn’t slow 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 in droves over the following year to complain about long delays, lost cash and government staff giving wrong information or unable to help.
We will have to see if the Government is better prepared and can avoid a repeat of the debacle before this April’s deadline.
State pension top-ups: A crunch deadline to fill gaps going back to 2006, rather than just the usual six years, is in April
There is hope that it can do so, because a new online tool was launched in 2023 to help people buy top-ups more easily, and since then we get far fewer messages from unhappy readers.
Thar said, we will shortly publish a story about three bungled cases, including one involving a 71-year-old whose money went missing in February 2023, yet still hadn’t had a pension increase until we intervened.
The system is also still run 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 processing top-up payments. The DWP is in charge of revising state pension forecasts or payments after purchases.
If money goes missing, it is hard to tell at which stage it happened and therefore which department to chase about it. Readers constantly tell us how they are sent round in circles, never finding any staff member willing to help solve the problem.
When we were investigating such cases for our latest story, we asked whether HMRC or DWP or both plan to allocate extra staff to deal with top-ups in the run-up to this April’s deadline, and if they intend to work more closely together so payments are processed efficiently and don’t get lost between them.
A Government spokesperson says: ‘There’s still time to make voluntary contributions before the 5 April 2025 deadline. We encourage people to act now.
‘HMRC and DWP will continue to work closely together and always prioritise resources as needed to manage spikes in demand, particularly for upcoming deadlines.
‘Where errors do occur we are committed to resolving them as soon as possible.’
Want to buy top-ups, or just check if it is worth doing in your own circumstances? Use the online top-ups service here or the HMRC app.
This is Money’s guide to buying state pension top-ups has some golden rules on deciding if you should fill gaps. If you have paid and heard nothing more, 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 in the last constituency you lived in and still request help. Find your MP here.
Cross-party policy: The last Chancellor Jeremy Hunt and his successor Rachel Reeves are both keen on using people’s pension savings to boost the stock market and economic growth
3. Pension megafunds: Using our retirement savings to boost the economy
Workers in smaller private schemes or local council schemes are going to see their savings moved to new pension ‘megafunds’ in coming years, the Chancellor Rachel Reeves has announced.
The forced mergers are intended to create funds with the scale to invest in a wider range of riskier, but potentially more high return assets.
The Government move builds on its predecessor’s idea of using people’s pension savings to boost the UK stock market and the economy.
Former Chancellor Jeremy Hunt persuaded top pension firms to say they would allocate 5 per cent of their ‘default’ workplace funds to unlisted equities, in a voluntary ‘Mansion House Compact’.
Reeves’s plan involves compelling 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 ‘megafunds’ will unlock £80billion of investment in exciting new businesses, infrastructure and local projects, while boosting retirement savings and driving economic growth to make people better off.
Research shows her goal has broad public support, with 57 per cent of people wanting their pension to include a higher percentage of UK company shares – though 42 per cent said that was under the proviso it would not impact investment returns.
Meanwhile, 54 per cent want their pensions to invest more into private assets like housing schemes, infrastructure projects, and early-stage growth companies.
The Abrdn survey of 3,000 people, weighted to be nationally representative, found 14 per cent did not want this and 32 per cent were not sure.
A This is Money reader poll suggested far greater scepticism, with 66 per cent wanting their pension invested purely to get the best returns.
Some 21 per cent said they supported using pensions to drive economic growth as long as it didn’t lower their returns.
Public debate will ramp up next year, as the Government holds a consultation then introduces its reforms in a pending Pension Schemes Bill.