Pensions in 2025: what savers need to know about the shock IHT move and a tight state pension deadline

The new government has already made its mark by announcing significant pension changes, and much more could follow.

Before the election, Chancellor Rachel Reeves promised a major overhaul of the pension system, which is now underway and could be seismic if it meets the challenge of reforming the pension tax credit.

An attack on better-off pension savers could deliver billions of pounds to other government spending priorities, but the obstacles are so great that Reeves might want to think twice about it, like her Tory predecessors.

Meanwhile, the government has pledged to honor the state pensions triple lock when it comes to annual increases, with next year’s headline rate increase to £11,960 due to take place in the spring.

A decision on the next increase in the state pension age to 68 comes too late after the last government revised the timing but wavered on its assessment.

Reeves could employ similar delaying tactics, especially since voters will be unhappy enough if the age increase to 67 gets underway between 2026 and 2028.

The minimum age for access to work and other private pensions will also increase, from 55 to 57, but not until April 2028.

This year, the shock move to cut inheritance tax on pensions will continue to reverberate as wealthy families try to protect their estates ahead of the change in just over two years’ time.

Below we take a closer look at these and other major issues facing pension savers and retirees. Here’s what you need to know in 2025.

1. Inherited pensions: unrest and ‘double taxation’ of up to 70.5%

The government’s plan to make pensions subject to inheritance tax, like other assets such as property, savings and investments, has raised many questions from readers following the announcement in the Budget.

The change won’t come until April 2027, but many people who have used pensions as a wealth planning tool will want to review existing arrangements well in advance.

Some want to cash in as much of their pension as possible while avoiding a high income tax bill, or donate excess income that remains free of inheritance tax, provided you can afford it.

Others decide whether to leave most or all of their estate to spouses – who can still benefit from estate tax-free inheritance – rather than to their children to delay and minimize the final bill.

Since pension freedom reforms in 2015, pension pots have been treated generously by the tax authorities when people die, especially before the age of 75, when they are tax free.

We have a full overview of how hereditary pensions are currently taxed here, as this will remain relevant over the next two years. See the box below for the new mitigation strategies for the future.

The government says it is ‘removing the opportunity for individuals to use pensions as a means of inheritance tax planning’ by bringing unused pots within the scope of inheritance tax.

However, financial experts warn that the plans will result in the richest families, where beneficiaries pay the highest rate of income tax, facing a ‘double taxation’ of as much as 70.5 percent.

Meanwhile, from April 2027, discretionary death benefits will also be included in the estate for inheritance tax purposes.

Steve Webb, former Pensions Secretary and This is Money columnist, believes these changes could lead to ‘massive bureaucracy and delays for grieving families’.

Webb, who is now a partner at LCP, says: ‘People will need to know which pension schemes to contact, they will have to rely on efficient pension administration – suspending the whole process until the slowest scheme has responded – and then they may have to you still have to wait months before the death benefits and pension balances can be released by the scheme.’

2. Supplements to the state pension: the deadline for the special deal ends in April

A crucial deadline for buying top-ups dating back to 2006, instead of just the usual six years, is approaching again.

Savers have until April 5 to take advantage of this concession – unless it is postponed for the third time.

Buying top-ups can provide a generous boost to retirement income if you buy the right years on your record.

And by early 2023, the time-limited deal to fill many previous gaps proved so popular that there was a rush to meet the April deadline of that year.

Buyers jammed phone lines and overwhelmed the system. The crisis eventually forced the government to extend the cut-off date twice, first until midsummer and then when demand only eased comfortably after the next elections in spring 2025.

The chaos didn’t end there as there was a huge backlog in processing payments. This is Money readers contacted us en masse the following year to complain about long delays, lost cash and government staff giving wrong information or being unable to help.

We will have to see if the government is better prepared and can prevent a repeat of the debacle before the April deadline.

There’s hope this could happen, because a new online tool was launched in 2023 to help people buy top-ups more easily, and since then we’ve been getting far fewer messages from disgruntled readers.

Thar said we will soon publish a story on three failed cases, including one involving a 71-year-old whose money disappeared in February 2023 but had still not had a pension increase until we intervened.

The system also continues to be jointly managed by HMRC and the Department for Work and Pensions.

HMRC is responsible for maintaining national insurance records, which you should check for gaps in your state pension data, and for processing additional payments. The DWP is responsible for reviewing state pension forecasts or payments after purchases.

If money is lost it is difficult to say at what stage this has happened and therefore in which department it should be investigated. Readers tell us all the time how they are sent around in circles, without ever finding an employee willing to solve the problem.

When we were researching such cases for our last story, we asked whether HMRC or DWP or both plan to deploy additional staff to deal with the additions in the run-up to the April deadline, and whether they would plan to work together more closely. payments are processed efficiently and are not lost.

A government spokesperson said: ‘There is still time to make voluntary contributions before the deadline of April 5, 2025. We encourage people to take action now.

‘HMRC and DWP will continue to work closely and always prioritize resources as needed to meet peaks in demand, especially in view of upcoming deadlines.

‘If errors occur, we aim to resolve them as quickly as possible.’

Do you want to buy top-ups, or just see if it’s worth it in your circumstances? Use the online top-up service here or the HMRC app.

This is Money’s guide to buying top-ups to the state pension and contains some golden rules for deciding whether you need to fill gaps. If you have paid and have not heard back, please contact us at pensionquestions@thisismoney.co.uk.

Unfortunately, we cannot help everyone, so you can also contact your Member of Parliament. If you are an expat, you can contact the MP in the last constituency you lived in and still ask for help. Find your Member of Parliament here.

3. Pension mega funds: using our pension savings to stimulate the economy

Workers in smaller private or council schemes will see their savings moved to new pension mega-funds in the coming years, Chancellor Rachel Reeves has announced.

The forced mergers are intended to create funds with the scale to invest in a wider range of riskier, but potentially higher-yielding assets.

The government’s move builds on its predecessor’s idea to use people’s pension savings to boost the UK stock market and economy.

Former Chancellor Jeremy Hunt convinced top pension companies to say they would allocate 5 percent of their ‘standard’ workplace funds to unlisted shares, in a voluntary ‘Mansion House Compact’.

Reeves’ plan includes a mandatory consolidation of defined contribution plans below a certain size, and the pooling of assets from the 86 separate local government pension funds.

She says the resulting pension mega-funds will unlock £80 billion of investment in exciting new businesses, infrastructure and local projects, while boosting pension savings and boosting economic growth to make people better off.

Research shows her goal has broad public support, with 57 percent of people wanting their pensions to include a higher percentage of shares in British companies – although 42 percent say this is on the condition that it would not impact investment returns.

Meanwhile, 54 percent want their pensions to be invested more in private assets such as housing developments, infrastructure projects and early-stage growth companies.

The Abrdn survey of 3,000 people, weighted to be nationally representative, found that 14 percent did not want this and 32 percent were unsure.

A This is Money reader survey showed that there was much greater skepticism: 66 percent wanted their pension to be invested purely to achieve the best return.

About 21 percent said they support using pensions to boost economic growth, as long as it doesn’t reduce their returns.

The public debate will flare up again next year when the government holds a consultation and then introduces its reforms in a pending pension schemes law.