The Autumn Budget 2024: what does it mean for pensions?

This briefing explores the changes as described in the "IHT on pensions" Consultation launched immediately following the Autumn Budget. Consultation will close on 22 January 2025, after which it is possible that changes will be made to the proposals described below.

Pensions brought within scope of Inheritance Tax

Hands down the most interesting announcement of the Autumn Budget for anyone in the pensions industry (and arguably everyone else too…) is that from 6 April 2027 almost all pension benefits that pass on death will be included in the deceased's estate for inheritance tax ("IHT") purposes.

This means that the value of pension death benefits will be taken into account when calculating the overall value of a person's estate (meaning his property, money and possessions) and any IHT due. If the total value of the estate exceeds the nil-rate band which is currently £325,000 (and any other allowances or exemptions available) the excess will be subject to IHT at a rate of 40%.

This change will apply equally to DB and DC schemes, as well as to non-UK schemes, with limited exemptions only for dependant's scheme pensions and charity lump sum death benefits.

The imposition of IHT will apply alongside the current taxing regime for pension death benefits. This means that on death at or after age 75, and on the proportion of death benefits over the "lump sum death benefit allowance" on death before 75, there will also be a charge to income tax. This could give rise to an effective tax rate on pension death benefits of 67%. We move from a favourable tax regime for pension benefits on death to a punitive regime…

From a trustee / scheme administrator perspective the changes are not at all straightforward. Reporting requirements will be imposed on scheme administrators ("PSAs" as they're referred to in the Consultation) to assist personal representatives ("PRs") with establishing the total value of the estate, and PSAs will become liable for calculating, paying and reporting the IHT due on pension death benefits. PSAs will be required to apply a proportion of the nil-rate band to pension benefits as well as the spouse exemption, where appropriate.

Interest on the late payment of IHT is applied by HMRC from six months after the date of death. The timeline for trustees to make a decision regarding pension death benefit beneficiaries and to communicate their decision looks like it will therefore become considerably more compressed than the current "2-year max" period that trustees commonly have reference to now. Arguably unrealistically compressed. These challenges are even greater where the trustee itself is not also the PSA.

Changes to the Overseas Transfer Charge

Changes are afoot too for qualifying recognised overseas pension schemes ("QROPS"), which are the only non-UK pension schemes that can receive a transfer from a UK registered pension scheme without an unauthorised payments tax charge applying. With effect from 30 October 2024, there will no longer be an exclusion from the 25% Overseas Transfer Charge where the QROPS is established in the EEA or Gibraltar and the transferring member remains in the UK.

It is not yet clear whether this change is intended to impact the transfer of pension benefits out of the UK where the pension scheme member is also leaving the UK (providing the member ceases to be UK resident before the transfer is made).

Further, from 6 April 2025 overseas pension schemes established in the EEA will be required to be regulated by a regulator of pension schemes in that country, and registered overseas pension schemes established in the EEA must be established in a country or territory with which the UK has a double taxation agreement that provides for the exchange of information, or a Tax Information Exchange Agreement.

Members and trustees (of UK schemes and QROPS) will be interested to understand the implications of a transfer having been made from a UK registered scheme to a QROPS where, from 6 April 2025, that scheme no longer meets the requirements to be a QROPS.

UK resident scheme administrators

From 6 April 2026, scheme administrators of registered pension schemes must be UK resident.

Triple lock to be maintained

Pensioners will continue to benefit from the triple lock, under which the State Pension is increased in line with the higher of wages, inflation or 2.5%. This will result in an increase in the State Pension of 4.1% in 2025/26.

Increases to the living wage and minimum wage

From 6 April 2025, the national living wage will increase to £12.21 an hour, and the minimum wage for eligible workers aged 18-20 will increase to £10 an hour. These changes will bring more workers, and therefore employers, within the scope of the automatic enrolment requirements.

What next?

Setting aside political and personal views on pensions, tax and inheritance, it's disappointing to be faced with proposed changes that will add yet another layer of complexity to pension scheme administration and, more importantly, that pose a real risk of undermining public enthusiasm for pension saving.

The proposals as set out in the Consultation do not adequately take account of the realities of dealing with pension death benefits, grieving families and potential beneficiaries. The proposals do not in our view allow sufficient time for trustees and PSAs to discharge their duties adequately, nor do they take proper account of the complexities involved in making PSAs liable for IHT and potentially also for penalties (where they may not have proper recourse to funds to meet those liabilities).

As well as requiring support around administrative procedures and understanding the implications of the changes on trustee decision-making, we expect trustees, administrators and employers will also want to consider matters such as the use of alternative arrangements for the provision of death in service benefits, the on-going value of discretionary arrangements for the payment of pension death benefits, and the adequacy of current administration contracts for dealing with the new calculation and reporting obligations.

If you would like to discuss how these changes may affect you or your scheme please do not hesitate to contact Estella Bogira at estella.bogira@shlegal.com or on 0207 809 2298, or your usual Stephenson Harwood contact.