Autumn Budget 2025: how might the government change pensions?

Is the government gearing up for another round of reforms to the pension and retirement regime?

As happens before each annual Budget, rumours are building as to what changes could be on the way. 

Even without the Budget, officials have announced that a Pensions Commission will be established - or rather resurrected - to come up with ways to combat faltering retirement income provision in the UK. They have pointed to troubling forecasts which suggest people retiring in 2050 - those in their forties now - will have private pension income 8% lower than their counterparts today.

The plans echo an earlier Pensions Commission - established in 2002 - which had the same brief of tackling insufficient retirement saving. That first Commission eventually established ‘auto-enrolment’ - the system whereby eligible workers are automatically enrolled into workplace pensions which has resulted in millions more workers saving something for their retirement.

• Read the full round-up: What can we expect in the Autumn Budget?

Separately, a new review of the State Pension age will also take place, while several other changes to the treatment of inherited pensions and the taxation of retirement savings are either ongoing or rumoured.

Here we round-up how the government might change pensions. Remember - none of these are certain and you should always base your financial decisions on the rules in place at the time.

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Tax-free cash

There has been much speculation that the Budget on 26 November could bring significant reforms to tax-free cash on pension.

Rules governing the ‘Pension Commencement Lump Sum’ - the technical name for pension tax-free cash - allow for 25% of pension money to be accessed without tax to pay, up to a limit of £268,275. This can happen from age 55 (rising to 57 in 2028). The influential Institute for Fiscal Studies has previously suggested that this ‘tax-free cash’ - could be reduced to £100,000 and Treasury ministers were reported as considering the plan. Some press reports have suggested this week that the Treasury may not reduce the limit.

The speculation - alongside the announcement to include pension money in estate for Inheritance Tax (see below) - has contributed to a sharp increase in people accessing their tax-free cash. 

• Read: How to make the right decision on taking pension tax-free cash
• Read: Don’t cash your pension lump sum until you’ve read this
• Read: 5 good reasons to take your tax-free cash - and 5 bad ones
   

Pension tax relief

Money contributed to a pension can benefit from tax relief. Basic rate tax relief is added automatically, meaning an £80 contribution becomes £100 inside a pension, while extra relief is available for higher and additional rate taxpayers which can be claimed back through their tax return. Income tax then potentially applies on withdrawals.

It means the biggest benefits are often available to those earning at higher levels and then withdrawing at lower ones.

•    Read more: How quickly will UK pension ages rise?

There has long been talk that the system could be changed to target the benefits of tax relief more to those on lower earnings. Previously Rachel Reeves, the Chancellor of the Exchequer, has argued in favour of a flat rate of 33% relief for everyone although the government has insisted that this is not its policy, and no longer Reeves’ view.

Salary sacrifice in the crosshairs?

Many employees choose to ‘sacrifice’ part of their salary in exchange for higher contributions into their workplace pension. This can be tax-efficient for both the employee and the employer, as pension contributions — unlike salary payments — are not subject to income tax or National Insurance. This option has become more attractive for employers following this April’s increase in their NI rates.

But speculation has grown that this option could be closed following the publication of HMRC research into how employers might react should the rules be changed.

There are a number of ways the government could limit salary sacrifice and recoup some of the tax revenue lost through these schemes. One option might be to cap the amount individuals can sacrifice — effectively targeting higher earners who are maximising these arrangements. However, the government could take a broader brush approach and remove the NI exemption, or both the NI and tax exemption, on all of these salary sacrifice payments.

Lifetime Allowance - more change to come?

A major reform of the last Conservative government was to remove the Lifetime Allowance for pensions - a total amount of pension savings that you could build up while still getting the full tax benefits. The Lifetime Allowance had been set at £1,073,100 before it was abolished. Note - a limit on the 25% tax-free cash available from pensions was retained and set at £268,275 (25% of the old Lifetime Allowance).

Earlier this year reports emerged that reinstating the Lifetime Allowance was on a list of proposed tax increases being mulled in government. Chancellor Rachel Reeves has, however, declined to take this one any further - for now.

Auto-enrolment - paying more into a workplace pension?

Top of the to-do list for the new Pension Commission is updating rules for auto-enrolment. Right now, eligible employees automatically begin saving into a pension provided by their employer, with a minimum total contribution of 8% of qualifying earnings, with at least 3% coming from the employer. 

Those rates were set so as not to encourage people to opt-out of their pension - but they are unlikely to be sufficient to meet expectations of retirement income in the future. The Commission will decide whether higher rates should now apply.

In announcing its work, the Commission also pointed to specific groups - the self-employed, the young, members of some ethnic groups - who were facing higher shortfalls in their saving. The eligibility rules of auto-enrolment could be expanded to better cover these groups.

State Pension Age - will you wait longer for yours?

As well as the new Pension Commission, the government has also confirmed a review of the State Pension age - the age at which you are eligible to claim the payment.

As it stands, the state pension age is 66 for both men and women. It will steadily rise to 68 by 2044-46, affecting those born after April 1977.

The government is required to conduct a review into the state pension age every six years. The last one concluded in 2023, and the newly announced review is due to finish in 2029. The last review mooted a possible rise to 69 in 2046-48.

The review will consider the expected cost of the State Pension, and changes in life expectancy. The long-term trend of people living longer has helped increases in the State Pension Age. However, that trend has faltered with life expectancy dipping slightly in recent years.

The ‘Triple Lock’ - unaffordable?

First introduced in 2011, the Triple Lock is the promise to raise the State Pension each year by the highest of either inflation, wages or 2.5%. The Triple Lock guarantees that increases in the State Pension will never lag any of these measures - not just over extended periods but in each and every individual year as well.

•    Read more: Triple Lock - what will the State Pension be in the future?

Its effect has been dramatic. The full State Pension has been set at £230.25 a week, or £11,973 a year, for the 2025/26 tax year after a 4.1% rise. That was the average relevant wage rise in the year before. Consider that as recently as the 2022/23 tax year the State Pension was just £185.15 a week - meaning it has risen more than 24% in three years.

That also makes it very costly, and two recent reports by economic think-tanks have suggested the payment will be unaffordable within 10 years. Both Labour and the Conservative parties promised, however, to retain the Triple Lock in this parliament ahead of the 2024 election.

Tax on inherited pensions

Plans announced in last year’s Budget will mean pensions are included in estates for inheritance tax (IHT) purposes from April 2027. While a majority of people won’t be affected, the change could upend the finances of those who are.

Under the current rules, pension money falls outside of a person’s estate for inheritance tax purposes and can therefore be passed to beneficiaries without IHT applying. If death occurs before age 75 then no tax applies, and if after age 75 then the beneficiary pays income tax at their own marginal rate.

•    Read more on the new ‘double taxation’ on inherited pensions

This has led some people to organise their retirement finances in a way that preserves money held in pensions so that it could be passed on free of IHT. It has made sense for them to use money from other sources in retirement - including ISAs or other savings - before turning to pensions. 

The upcoming change - which is the subject of lobbying from the retirement industry - would require a big rethink for those preserving money in pensions for this purpose.

• Read: How 4% inflation could derail your retirement 
• Read: The '£299,325' cost of matching the State Pension
• Read: What income might I get from a £250,000 pension? 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA or SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Select 50 is not a personal recommendation to buy funds. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.