By Giliker Flynn – Family-run independent financial advisers, helping families plan with confidence.
Why Pensions Are So Often in the Firing Line
Every Budget brings speculation about tax changes — and pensions are usually near the top of the list. Why?
Scale of pension wealth – UK pension assets exceed £2.5 trillion. Even small policy changes can generate significant revenue.
Political calculation – Adjusting pension rules is often seen as less politically damaging than raising income tax or VAT.
Structural generosity – The current system offers substantial tax advantages, particularly for higher earners.
Demographic shifts – As more people retire with larger pots, the government faces growing pension tax expenditure.
In short: pensions are a politically “easy” lever to pull.
What’s Already Been Signalled
Although the Budget hasn’t yet been delivered (expected Spring 2026), Treasury officials and ministers have already hinted strongly at areas under review.
Key signals include:
A possible freeze or reduction of the 25% tax-free lump sum allowance.
A shift to flat-rate tax relief on pension contributions.
Acceleration of inheritance tax changes for pensions (already set for April 2027).
Revised annual allowances and taper thresholds for higher earners.
Potential new wealth or windfall taxes targeting pension pots above certain values.
While these are not yet confirmed, they form a clear direction of travel.
Areas Most Likely to Be Targeted
1. Tax-Free Lump Sum Allowance
The 25% tax-free lump sum — currently capped at £268,275 — is one of the most valuable pension perks.
The Budget could:
Freeze the allowance (letting inflation erode its real value)
Reduce the 25% rate to a lower figure (e.g. 20%)
Cap lump sums more tightly for high-value pots
For someone with a £500,000 pension pot, a cut from 25% to 20% would mean £25,000 less tax-free cash.
This is the most politically manageable pension change — and therefore, the most likely.
2. Tax Relief on Contributions
Currently, pension contributions receive tax relief at the individual’s marginal income tax rate. For higher earners, that means 40% or 45% tax relief.
The Budget could:
Replace marginal relief with a flat rate, potentially around 30%
Introduce further tapering for the very highest earners
Restrict tax relief for certain forms of employer contributions
This would make the system simpler — and raise substantial revenue — but would be felt most by middle and higher earners.
3. Annual and Lifetime Allowance Adjustments
While the Lifetime Allowance has been formally abolished, there’s growing speculation that Labour could introduce a replacement cap, potentially disguised as a “lump sum allowance limit” or “benefit cap.”
Possible moves include:
A de facto new lifetime limit for tax-advantaged growth
Lowering the annual allowance below £60,000
Tightening tapered allowance rules
This could reduce the long-term tax efficiency of larger pension savings.
4. Inheritance Tax and Pension Death Benefits
We already know unused pensions will fall into IHT from April 2027. The Budget could:
Bring that change forward
Lower or freeze nil-rate bands
Introduce an additional “pension death charge” on large pots
This would hit wealthier estates particularly hard.
5. Wealth-Based Charges or Means Testing
A more speculative — but increasingly discussed — idea is the introduction of wealth-based charges on very large pension pots.
Examples might include:
A “pension solidarity levy” above £2 million
Means testing for certain tax benefits
Adjustments to higher-rate tax reliefs for those with substantial assets
While politically sensitive, such measures would be targeted at a small group of wealthier savers and could raise meaningful revenue.
Why This Budget Is Different
Not every Budget produces sweeping pension changes. But this one is different for three reasons:
Fiscal pressure – The government faces a substantial funding gap.
Political positioning – Labour has pledged not to raise Income Tax, VAT or National Insurance. That limits their options.
Timing – The pension tax system has been in flux since the abolition of the Lifetime Allowance, and there’s a political incentive to consolidate.
Pensions represent a large, relatively untapped revenue stream. A change is not guaranteed — but it’s highly probable.
Who Could Be Most Affected
Higher Earners
At risk from reduced tax relief on contributions
More likely to be impacted by lump sum caps or tapering
May face new limits on contributions
Those with Larger Pension Pots
More exposed to IHT changes and potential wealth levies
May see reduced flexibility in accessing tax-free cash
People Approaching Retirement
Potentially limited time to secure current allowances
May choose to access lump sums or contributions early to lock in existing benefits
Younger Savers
More exposed to flat-rate relief and long-term accumulation caps
Could face lower incentives to contribute
What You Can Do Before the Budget
While policy changes can’t be perfectly predicted, there are strategic actions you can take to reduce your exposure.
1. Review and Maximise Contributions
If you’re a higher-rate taxpayer, maximising contributions before any flat-rate relief is introduced could save you thousands.
For example, a £20,000 contribution with 40% relief saves £8,000 in tax. If relief falls to 30%, that saving drops to £6,000.
2. Consider Using Carry Forward Allowances
The carry forward rules allow you to use unused annual allowance from the previous three tax years (subject to eligibility). This can be a powerful way to get more money into your pension under the current rules.
If the annual allowance or tax relief changes, this opportunity may shrink.
3. Evaluate Taking Tax-Free Lump Sum Sooner
If the 25% tax-free lump sum is reduced, accessing some or all of it before the Budget could lock in your entitlement.
This should be balanced carefully against:
Income needs
Investment growth potential
IHT planning
4. Stress-Test Your Retirement Plan
A well-constructed retirement plan can handle policy shocks more effectively.
We recommend:
Modelling your retirement income under multiple tax scenarios
Stress-testing different contribution and withdrawal strategies
Reviewing whether ISAs or other investment wrappers could play a larger role
5. Coordinate Pension and Estate Planning
With pensions now firmly part of the IHT landscape from 2027, coordinating your withdrawal, contribution, and gifting strategies could make a major difference to what your family ultimately inherits.
Case Studies
Case Study 1 — High Earner, Lump Sum Risk
James, 58, earns £120,000 per year and has a £700,000 pension pot.
He’s planning to retire at 60.
If the tax-free lump sum falls from 25% to 20%, his available tax-free cash would drop from £175,000 to £140,000 — a £35,000 reduction.
By taking part of the lump sum early, he can secure today’s entitlement.
Case Study 2 — Maximising Contributions
Rachel, 45, has unused annual allowance for the past three years and is a higher-rate taxpayer.
She contributes £60,000 before the Budget.
At 40% relief, she saves £24,000 in tax.
If flat-rate 30% relief is introduced later, that saving would have been £18,000.
Early action saves her £6,000 in tax.
Case Study 3 — Pre-Budget Withdrawal Strategy
Tom and Anna, both 66, hold a £600,000 joint pension pot.
They decide to crystallise 25% (£150,000) before the Budget.
£75,000 goes into ISAs, and the remainder into cash savings as a buffer.
Their future exposure to lump sum cuts is removed, and their taxable estate is reduced ahead of 2027 IHT reforms.
The Interplay With IHT Changes
The Budget and the 2027 IHT reforms aren’t happening in isolation. Many households will be affected by both.
Taking lump sums early can reduce pension IHT exposure.
Gifting strategies can be coordinated with contribution timing.
A well-planned approach can save families significant tax in the medium term.
Why Reacting in Panic Is Risky
Pension tax changes can tempt people to make rushed decisions. But:
Large lump sum withdrawals can hurt long-term income sustainability.
Early action without planning can trigger unnecessary tax.
Short-term political speculation doesn’t always translate into immediate change.
The best approach is measured action with a clear strategy — not fear-driven withdrawals.
Our View at Giliker Flynn
We expect the next Budget to:
Introduce a freeze or cut to the tax-free lump sum allowance
Move toward flat-rate tax relief for contributions
Tighten rules for larger pension pots
This won’t affect everyone equally, but for those approaching retirement or holding larger pots, preparation is key.
At Giliker Flynn, we’re helping clients model multiple scenarios — so whatever the Chancellor announces, they’re ready.
Practical Next Steps
Review your pension pot and contribution history.
Maximise contributions where beneficial before the Budget.
Consider partial lump sum withdrawals to lock in today’s tax-free allowances.
Model multiple tax outcomes with your adviser.
Coordinate with estate planning to prepare for the 2027 IHT changes.
Stay informed — policy details can change rapidly around Budget time.
Conclusion
Budgets are pivotal moments in pension planning. The next one is likely to bring meaningful changes — especially for higher earners and those with larger pension pots.
Acting early, strategically, and with professional guidance can help you lock in existing allowances, maximise reliefs, and protect your future income.
Important: Tax and pension rules can change, and their value depends on your circumstances. Always seek regulated financial advice before making decisions.
Giliker Flynn is a family-run, independent financial advice firm helping people across the UK build secure retirements and protect their wealth for future generations.