Key budget takeaways: Pension trustees 

For many pension scheme trustees, the latest UK budget likely came with a sigh of relief, as many rumoured changes did not come to fruition. However, the budget from the new Labour government still brings significant changes for pension scheme trustees.

From new inheritance tax rules, to a potential boost to pension adequacy, cost challenges for scheme sponsors and with more reforms still to come, understanding the implications of these changes will be crucial to adapting scheme administration and guiding members towards the best possible outcomes.

Inheritance tax on unspent pensions

News that unspent pension savings will be subject to inheritance tax (IHT) from April 2027, is one of the stories that will likely cut through the noise and catch the attention of pension scheme members. 

While there will be a consultation, it will focus on the practicalities of applying IHT, not on the policy itself, so trustees must prepare to work with the change.

Under the new rules, many death benefits from both defined benefit (DB) and defined contribution (DC) schemes and unspent DC funds will need to be included in a deceased member’s estate and the value tested against the existing IHT thresholds, which have been frozen till 2030. Crucially, it will be the responsibility of pension providers (rather than the deceased member’s personal representatives) to pay any tax due to HMRC, which will require new administration procedures. 

Tess Page, Wealth Strategy Leader at Mercer, says: “This policy is going ahead, and will reshape how members view retirement and estate planning. But, the devil is in the detail. Not all death benefits from pension schemes will be subject to IHT, but many will, and this ambiguity means trustees must stay informed about which benefits fall under the new rules so they can continue to guide their members effectively.”

Wage increases, pension adequacy and cost challenges for sponsors

Wage increases for low-income workers – by 6.7% for the National Living Wage and 16% for the National Minimum Wage – is a two-sided issue for trustees, posing both challenges and benefits. 

Higher wages mean more money going into pensions for auto-enrolled employees, which has the potential to boost pension adequacy for low-wage workers. This move could be a significant long-term benefit for many of the 17 million UK adults1 who are not saving enough for retirement. Additionally, minimum wage increases don’t just affect those workers – they have knock-on effects for low- to mid-income earners whose salary expectations change as a result.

Page says: “Higher wages should bolster DC pension pots as contributions are a percentage of salary. That’s assuming we don’t have reduced hiring, or cuts to employment or pension contribution rates, in response.”

Employer National Insurance contributions will also be rising following the budget, further increasing employer costs. Trustees of DB pension schemes will need to consider the impact these changes might have on scheme sponsors’ ability to support schemes, including the affordability of any ongoing deficit payments.

Engage with the pensions review

Some further tough decisions are expected to be made in the coming months as part of the ongoing pensions review.

The review is unfolding in two phases: the first addresses scheme consolidation and investment in UK assets, while the second will focus on outcomes for individuals. There is still time to have your say – while the call for evidence has closed for phase one, phase two is expected to begin shortly. 

The latest budget presents complex changes that will shape trustee responsibilities for years to come – with more reforms on the horizon.

No matter how you view the new budget changes – positive, negative or complex – success lies in taking proactive steps to respond. For more insights into the 2024 budget, see our key takeaways for health & wellbeing, career and pension sponsors.
This blog is intended for general information only. It does not contain investment, financial, legal, tax or any other advice and should not be relied upon for this purpose. It is not tailored to any particular personal and/or financial position. If you require advice based on specific circumstances, you should contact a professional adviser.

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