Based on the announcements in this Autumn 2025 Budget and the major tax changes confirmed to take effect soon, here is a summary of the key points affecting those planning to retire.
At a Glance: The Headlines
- Good News: The State Pension is set to rise significantly again in April 2026 (by 4.8%) due to the Triple Lock.
- Bad News: The “Death Tax” loophole is closing. From April 2027, unspent pension pots will be subject to Inheritance Tax (IHT).
- The “Silent” Cost: Income tax thresholds remain frozen. As your State Pension rises, it consumes more of your tax-free allowance, potentially dragging your private pension income into a tax bracket.
1. State Pension Increase (April 2026)
The government has maintained the Triple Lock commitment.
- The Rise: The State Pension will increase by 4.8% in April 2026.
- The Numbers: This equates to an increase of approximately £575 per year for those on the full New State Pension.
- Impact: While this boosts income, it pushes you closer to the frozen income tax personal allowance (£12,570), meaning a larger portion of your private pension income may be taxed.
2. Inheritance Tax on Pensions (Effectively April 2027)
This is the most significant change for retirees focusing on legacy planning. Originally announced in 2024, the government has now solidified the details.
- The Change: From 6 April 2027, most unused pension funds and death benefits will be included in your estate for Inheritance Tax (IHT) purposes.
- Previously: Pensions were typically “outside” the estate, meaning they could be passed to beneficiaries tax-free (if you died before 75) or at the beneficiary’s marginal rate (if you died after 75), avoiding 40% IHT.
- New Reality: Your pension will now be counted towards your IHT threshold (£325k standard / £500k with residence band). If your total assets (home + savings + pension) exceed your allowances, your beneficiaries could face a double hit:
- Inheritance Tax (40%) deducted from the pension fund.
- Income Tax paid by the beneficiary on the remaining amount (if you die post-75).
- Action: This removes the incentive to “spend the pension last.” It may now be more tax-efficient to spend your pension income during your lifetime rather than ISAs.
3. Tax-Free Lump Sum (PCLS)
- The News: There was no change to the tax-free lump sum rules in the recent Budget.
- The Rule: You can still take 25% of your pension tax-free, but this is capped at £268,275 (unless you have specific prior protections).
- Inflation Warning: While the cap was not cut, it remains frozen. In real terms, inflation is eroding the value of this allowance every year.
4. Income Tax Thresholds (Fiscal Drag)
- Frozen: The Personal Allowance remains frozen at £12,570 until at least 2028.
- The Trap: As the State Pension rises to roughly £12,000+ over the coming years, you will be left with a very small amount of “tax-free” room for your private pension or part-time work. Most of your private retirement income will likely be taxed at the basic rate (20%).
5. Other Notable Points
- Winter Fuel Payment: Access remains restricted to those receiving Pension Credit (and certain other means-tested benefits). If you are on the borderline of eligibility for Pension Credit, it is vital to check if you can claim it to unlock the fuel payment.
- Stamp Duty (Second Homes): If you are planning to fund retirement by selling a buy-to-let or downsizing to buy a second property, remember the surcharge on additional dwellings increased to 5% (effective from late 2024).
Summary Table: Old vs. New Rules
| Feature | Previous Rules | New/Confirmed Rules |
| State Pension | Rose 4.1% (Apr 2025) | Rising 4.8% (Apr 2026) |
| Pension IHT | Generally Exempt | Taxable in Estate (from Apr 2027) |
| Tax-Free Cash | 25% (Capped £268k) | No Change (Frozen Cap) |
| Tax Threshold | £12,570 (Frozen) | £12,570 (Frozen) |
WHAT SHOULD I DO NOW?
Given the looming 2027 changes to Inheritance Tax, the standard advice of “spend your ISA first, pension last” may no longer be the most tax-efficient strategy for you.
If you want advice, we can explain how the “Pension vs. ISA” spending strategy changes under these new Inheritance Tax rules.