Autumn Budget 2024: limited pension changes still require careful ...

After weeks of rumour and speculation, the Chancellor yesterday unveiled what amounted to minimal changes to the pensions tax regime as part of the Autumn Budget.

The much trailed reduction of employer National Insurance Contributions (NIC) relief on pension contributions did not materialise, nor did the mooted changes to the amount of tax free cash available at retirement.

Reforms were, however, announced to bring unused pension funds (including death benefits payable from a pension) into a person's estate for inheritance tax purposes from 6 April 2027.

The wider increase in employer NICs may also have a ripple effect in terms of the pension provision offered by sponsoring employers. 

Whilst the Budget referenced the government's recent call for evidence as part of its pension investment review, no further details emerged on encouraging pension schemes to invest in productive finance and supporting wider growth in the UK economy (read more in our article here).

We take a look below at the key changes and how these may impact sponsoring employers and trustees of occupational pension schemes.

Inheritance tax on unused pension funds

Currently unused pension funds (including death benefits payable from a pension) which are paid as lump sum death benefits through discretionary trust provisions do not form part of the deceased's estate and are not subject to inheritance tax.

Similarly lump sum death benefits paid from a pension scheme do not attract income tax if the deceased was under age 75 at the time of death and the payment does not exceed the standard lump sum and death benefit allowance of £1,073,100. Such death benefits are, however, subject to an income tax charge at the recipient's marginal rate of tax where the member dies on or after age 75.

The changes announced in the Budget will mean that from 6 April 2027 unused pension funds (including death benefits payable from a pension) will be brought into a person's estate for inheritance tax purposes.

Our comment: whilst trustees and sponsoring employers will have time to prepare for these changes, more detail is required from the government as to the scope of the reforms.

The Chancellor's stated intention is to:

"restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pension reforms".

Whilst this points to a focus on tackling the use of defined contribution schemes for purely inheritance tax planning purposes, an accompanying consultation from HMRC published yesterday seems to suggest that the reforms will be wider. In particular clarity is needed on whether the changes will also apply to:

• Lump sum death benefits which derive from a defined benefit pension, or
• Standalone lump sum death benefits (which do not derive from a pension) and if so, whether there will be any difference between those provided through a registered pension scheme and those provided through an excepted group life arrangement.

Trustees will need to carefully assess the changes and may need to review their processes around the provision of death benefits and how they operate their discretionary trust provisions to distribute lump sum death benefits going forward. The reforms may also necessitate changes to the governing provisions of the pension scheme.

Increase to employer NICs

The rate of employer NICs will increase from 13.8% to 15% from 6 April 2025. Alongside this the threshold at which employers start to pay NICs will be reduced from £9,100 to £5,000 a year from 6 April 2025 to 6 April 2028 (and then uprated by CPI).

Our comment: this change does not directly impact pensions, but it is likely to carry a substantial cost for sponsoring employers and could have a ripple effect in terms of the pension provision offered by them.

For example:

• Those employers who offer pension contributions at a rate more generous than the auto-enrolment minimum standards may choose to review contribution rates to defined contribution schemes as a means of offsetting their increased NIC costs,
• Similarly, whilst the salary sacrifice of pension contributions is likely to remain an efficient way of making contributions to a scheme, employers may wish to review whether they continue to share the employer NIC saving on salary sacrificed pension contributions or instead use this to mitigate the impact of their increased NIC bill.

Both measures could have an impact on the adequacy of pension savings for members and there is of course the wider debate around whether auto-enrolment minimum contributions should increase more generally. Will the government be tempted to push such reforms down the line to ease the burden on employers?

Employers contemplating such changes will need to carefully consider whether they can unilaterally do so in line with both the governing provisions of the scheme and contractual terms with employees.

Please get in touch with your regular pension team contact if you have any queries in relation to these changes or if you wish to discuss your occupational pension scheme more generally.