I’ve always found pensions to be an interesting topic of conversation. This might be why I get so few dinner party invites.

However, the current government now seems to agree with me. It’s likely that changes are afoot in the pension’s world. The government’s interest in pensions started with their decision that inheritance tax should be payable on pension funds and widened to consideration about how pension funds should be invested. More recently, they have started a review of the amounts that employers and employees should be made to pay into pension plans.

I thought it might be useful to provide a quick summary of what is going on currently.

Pensions and Inheritance Tax

From April 2027, the value of most pension funds will be included in your estate and will be included in the inheritance tax calculation. The government announced the changes in the Autumn Budget last year and has just responded with a policy paper. This has clarified how inheritance tax will be collected on any remaining pension funds on death.

It’s important to remember that the spousal exemption for inheritance tax applies to pension funds too. So, if you are married when you die, and leave your pension fund to your spouse, no inheritance tax will be payable at that point.

The process of paying inheritance tax on pensions will slow down the payment of benefits from pension funds to the beneficiaries. This is because the pension scheme administrator will need to provide information to the executors of the estate about the pension, and the administrators of the estate will need to include the pensions in any inheritance tax calculations.

HMRC will now need to build the systems to allow executors and pension scheme administrators to liaise and ensure that the inheritance tax nil rate bands are divided correctly between the main estate and the remaining pension funds. Pension companies and scheme administrators will also need to update their own systems to deal with the inheritance tax on pensions.

The executors of the estate will also need to determine how much inheritance tax is due from each of the pension schemes, taking account of the various nil rate bands for inheritance tax.

Some further clarification is required about who pays the inheritance tax due on the pensions, but there is an option for the inheritance tax in respect of the pension plan to be deducted from that plan and paid directly to HMRC.

If the April 2027 deadline is to be met, it looks like there will be some late nights for those involved in building the relevant systems.

At the time of writing, this policy paper is hot off the press, so we expect to see more clarification of the new rules in the next few months. We will keep you informed.

Investing in British Businesses and Infrastructure Projects

Typically, pension schemes have diversified their investments, following conventional investment thinking. As investment has become increasingly global and the UK has become a smaller part of the available investment universe, pension funds have allocated smaller and smaller amounts to the UK. This has meant that the UK tax breaks available to members of pensions have been used, indirectly, to support overseas businesses and to lend money to foreign countries and institutions. If you look at the largest investments in many pension funds, you will find large allocations to the US technology giants, like Apple and Microsoft, and you may also find US government bonds.

The government has decided that it wants to encourage pension schemes to invest in British businesses, and this approach started with the Mansion House Compact, which has now been superseded by the excitingly named Mansion House Accord.  Big pension companies like AVIVA, L&G and NEST agreed to commit 10% of their default workplace pension funds, by 2030, to infrastructure, property and private equity investments, with at least half of this being ringfenced for the UK. The government has stated that, if the pension schemes don’t move quickly enough, they may legislate to ensure that the investments are made.

Whilst this does seem like a good idea for the economy, nobody seems to have asked the opinion of the members of the pension schemes, and there has been little discussion of how things like infrastructure, property and private equity increase the risks of investing.  These types of investment tend to be difficult to value, and there can be times when it is just not possible to take money out of the investments at all – and these are just a couple of the obvious risks. People with money in their companies’ default pension funds may want to consider whether they want to have a significant part of their funds in these higher risk investments and take action if they don’t.

Reviewing Pension Contributions

The original Pensions Commission resulted in the system we have now, where employees automatically join pension schemes, into which they and their employers must pay contributions. This has been a success in many ways (it was a “huge success”, according to the Press Release), but Torsten Bell, Minister for Pensions, said “if we carry on as we are, tomorrow’s retirees’ risk being poorer than today’s” (that doesn’t sound like a “huge success” to me!).

The chief aim of the commission, which will report in 2027 would appear to be to increase the numbers of people saving for retirement.

Like previous governments, this one confuses saving into a pension with saving for retirement. Pensions are just one way to fund retirement, and a focus on one way of having a comfortable retirement is unlikely to succeed, in my opinion.

I hope that the government is persuaded that it may have to deliver some harsh truths. People may need to be told that if they don’t save enough for retirement, they will be poor when they stop work. My experience is that people need to be helped to comprehend the magnitude of the cost of a comfortable retirement and then given assistance to come up with a plan to achieve what they want. They may have to learn some simple, but uncomfortable truths along the way (e.g. if you haven’t saved enough money for retirement, you will have to work longer, reduce the amount you spend now, or accept that you will be worse off when you stop work). I hope that the Pension Commission will be brave enough to tell the government that it must communicate this type of tough love.

The State Pension Age Review

I’m happy to take bets from anyone who thinks that the state pension age will reduce following this review!

The government is required to review the state pension age every six years. The last review was in 2023. Currently, the state pension age is 66 and is scheduled to rise to 67 between 2026 and 2028, with a further rise to 68 after that. The state pension cost £124billion in the year to April 2024, which is about 5% of UK GDP.

There are two reasons why the state pension does need to be reviewed:

• People keep on living longer (this is good news!)
• The population, as a whole, is ageing

As a result, the state pension is projected to take up an increasing share of government revenue – there is no big, government pension fund, from which today’s pensioners are paid – the money simply comes from today’s pension receipts.

I’m not expecting to be entertaining people at parties with my “hilarious pension anecdotes” just yet, but I do expect the interest in pensions to grow as the various consultations progress. The good news is that pensions are topical because, generally, we are living longer and enjoying our older age more than previous generations. Selfishly, perhaps, I hope that continues. If you would like more information about the topics raised, or pensions and retirement planning generally, please contact us.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.

Past performance is used as a guide only; it is no guarantee of future performance.

Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.

A pension is a long-term investment, and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.

A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Your pension income could also be affected by the interest rate at the time you take the benefits. The tax implications of pension withdrawals will be based on your individual circumstances , tax legislation and regulation which are subject to change in the future.