The Autumn Budget 2026 : Pensions

Ever since April 2023 when the then Chancellor, Jeremy Hunt, announced the abolition of the lifetime allowance and introduced a monetary cap of £268,275 on tax-free lump sums, Budgets have been preceded by unhelpful rumours, leaks and speculation as to whether the limit will be reduced. Pleasingly those rumours were much quieter this year and indeed, once more, no changes were announced to the lump sum allowance or the other obvious pensions tax target, restricting tax relief on pension contributions to basic rate relief.

As expected, the big pensions announcements related to the state pension but there were four other uncontroversial and helpful tweaks to the tax legislation affecting private pensions which will be of wider interest to pension trustees, providers and their advisers some. All in all, the industry will likely breathe a sigh of relief given the forthcoming changes it is already grappling with in relation to the introduction of inheritance tax on pensions, the increase of the normal minimum pension age and the capping of NIC tax relief on pension contributions made through salary sacrifice.

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State pension

Triple lock

The largest component of the Government's welfare bill is the state pension. Attempts to limit its cost to date have involved raising the state pension age for both men and women to age 68 by 2046 but this is currently being reviewed alongside the work of the Pension Commission. A report produced by the Institute of Fiscal Studies in December 2023 showed that a third of people do not think the state pension will exist in 30 years’ time.

It is against this background that the Prime Minister announced proposed changes to the Triple Lock at the Labour Party Conference on 29 September 2026. These changes were confirmed in the Budget and are estimated to reduce State Pension spending by £15 billion a year by the late 2030s, and by £50 billion a year by the late 2040s. The proposals are:

The State Pension will continue to rise by the highest of 2.5%, inflation or earnings growth each year through to April 2029. This will take the State Pension to a record high relative to average earnings – the Government has previously stated that the new State Pension is expected to rise, over the course of the current Parliament, to over 30% of average earnings of UK workers.
Assuming the Government wins the next election, from April 2030 the Triple Lock will be adjusted (not removed) so that the State Pension will rise each year by the highest of 2.5%, inflation, or the amount required to maintain its value relative to earnings as reached in April 2029. These changes, according to the Government are designed "to put the State Pension on a sustainable footing for the decades ahead, giving people confidence that a rising State Pension will be there for them when they retire".

New Pension Tax Allowance

The ratcheting effect of the Triple Lock alongside the freezing of the personal allowance at £12,570 in 2021 means that from 6 April 2027 the full new State Pension will exceed the personal allowance for the first time. The Government had previously said it would ensure that pensioners with incomes currently at or under the value of the full new State Pension would not be brought into paying tax because of State Pension uprating during this Parliament. The Budget delivers on this commitment by introducing a new Pension Tax Allowance (PTA) from 6 April 2027, to be legislated for in the Finance Bill 2026-27.

The value of the PTA will be calculated by applying the basic rate of income tax (20%) to the difference between the full new State Pension and the personal allowance. Individuals over State Pension age will be eligible for the automatic tax deduction if their income, regardless of source, is below or at the value of the full new State Pension. For those with incomes just above the value of the full new State Pension, the allowance will be gradually withdrawn through a taper. The allowance will apply from 6 April 2027 until 5 April 2030 and will be uprated in line with the full new State Pension.

Serious ill-health lump sums

Currently, under the Finance Act 2004, before a member can be paid a serious ill-health lump sum, the trustees or scheme administrator must have received evidence from a registered medical practitioner that the member is expected to live for less than one year. As announced by the Pensions Minister at the Pensions UK Conference on 15 October 2026, the Government will amend this definition to a slightly more flexible test to allow a serious ill-health lump sum to be paid where a member can be reasonably expected to live for less than a year. This will apply to uncrystallised rights regardless of whether the member has reached the age of 75 (so whether it is taxable or not). Amendments will also be made to the definition of a registered medical practitioner to allow a medical practitioner based outside the UK to provide medical evidence of a terminal diagnosis if the member lives in the country where the practitioner practises medicine. The change is being made to align pension tax rules more closely with the 12-month end-of-life definition already used by the DWP to assess eligibility for state benefits and will take effect when the Finance Bill 2026-27 receives Royal Assent next year.

Tax treatment of pension and lump sum death benefits paid more than 2 years post-death

Currently, where a lump sum death benefit is paid in respect of a member who dies under the age 75, a payment (which might otherwise be tax free) can become subject to tax simply because the trustees pay out the lump sum more than two years after they first knew, or could reasonably have been expected to know, of the member's death. In such circumstances, if payment is made to “non-qualifying persons” (such as a trust), a special lump sum death benefits charge of 45% may be due. Where payment is made to an individual, income tax may be charged at the individual’s marginal rate of income tax.

Provisions will be included in the Finance Bill 2026-27 to remove the two-year rule for pension and lump sum death benefits, meaning that tax-free pension and lump sum death benefits will no longer become taxable solely because they are paid more than two years after the pension scheme administrator first knew, or could reasonably have been expected to know, of the member’s death. It will apply in relation to payments made on or after 28 October 2026. With the additional complexity and delays that may arise in making lump sum death benefits post 6 April 2027 when most pension funds and death benefits will brought into a person's estate for inheritance tax purposes, this amendment is welcome.

Collecting Tax Due on Excess Lump Sum Death Benefits

The Finance Bill 2026-27 will also introduce a new process for HMRC to assess and collect tax due on lump sum death benefits. Where the available lump sum and death benefit allowance of a member who died before age 75 is exceeded, the excess will no longer be treated as pension income of individual beneficiaries. Instead, a tax charge will be raised against those beneficiaries on their portion of the excess by reference to their marginal rate of income tax for the year the lump sum was paid.

Guided Retirement and Retirement Collective Defined Contribution pension schemes

Finally, the Government will introduce legislation in a future Finance Bill to support the market consolidation of defined contribution (DC) pension schemes and the introduction of Guided Retirement and Retirement-only Collective DC (R-CDC) schemes (expected to be introduced from the end of 2028 onwards). Legislation will amend the conditions in which an individual may keep their protected pension age or scheme-specific lump sum protection following a transfer of their pension rights between pension schemes. The legislation will also enable individuals who start receiving a pension under a R-CDC scheme to convert that pension to a drawdown pension within a set period, if the RCDC scheme chooses to provide that option.