Budget 2026 – pensions round-up

The run-up to this Autumn Budget has seemed much quieter than in previous years, perhaps a combination of fewer potential policy changes being ‘floated’ to test the waters with the markets, together with commentators heeding Government pleas for less speculation.  

At first pass this looks like a relatively low-key budget for the pensions industry, without the headline grabbing changes of recent years such as inheritance tax and salary sacrifice changes.

Much of the mainstream discussion is focused on the changes to the State Pension triple lock and how the new pension tax allowance for pensioners with incomes at or under the value of the full new State Pension will work. The Government has released a guidance document entitled ‘Pensions Tax Allowance explainer’ which sets out details on how the tax allowance will operate. 

However, scratch beneath the surface a little and there are some interesting measures for occupational and personal pension schemes to be aware of, including some helpful administrative easements.

• Tax easements on member death benefits 

Two-year limit removal

Tucked away in the Chancellor’s ‘Red Book’ is an announcement that many trustees and administrators will welcome, with confirmation that the rule that imposes an income tax charge on individual beneficiaries where pension or lump sum death benefits are paid more than two years after the scheme became (or should have become) aware of the member’s death will be removed (provided the member had sufficient lump sum and death benefit allowance available). 

This will apply to any payments made on or after 28 October 2026 (irrespective of the date of the member’s death) and will be introduced through the Finance Bill 2026-27. One point for schemes to be aware of is that this change is not expressed to be overriding, and therefore where scheme rules explicitly contain a ‘two-year’ deadline for payment restriction, an amendment may need to be made to scheme rules to enable trustees to take full advantage of this easement. Trustees and scheme managers are therefore advised to review their individual scheme documentation and seek legal input to support any required changes. 

The two-year limit is also being removed where beneficiary annuities are paid from the deceased member’s drawdown funds and where funds are designated for a UK resident under a pension scheme outside the UK.

This change came as a surprise but has been widely welcomed by the industry. Some commentators have suggested that it may have been motivated in part by the ongoing administration issues in the Civil Service Pension Scheme, where a significant backlog of cases has resulted in long delays in some benefits being paid.

Tax on excess lump sum death benefits

There are also some helpful changes to how tax is charged on certain pension lump sum death benefits paid above a deceased member’s available lump sum and death benefit allowance. These amounts will no longer be treated as pension income, with HMRC instead collecting a standalone tax charge at the recipient’s marginal rate of income tax. 

Beneficiaries will therefore still pay tax at the rate that reflects their wider income, but the excess lump sum amount will not be added to that income. The Government confirmed that this “will avoid reopening their wider tax and income-related benefits position, potentially several years after the payment was received.”

One important point to note is that though this change will be legislated for in the Finance Bill 2026-27, it will have retrospective effect for relevant lump sum death benefits paid on or after 6 April 2024 (the date when the lifetime allowance was abolished). Transitional provisions will also apply the same approach to relevant payments made in the 2023 - 2024 tax year. 

Consequential changes concerning the interaction where the benefit is subject to both income tax and inheritance tax will have effect from 6 April 2027.

Inheritance tax 

The Finance Act 2026 brought in provisions for most unused pension funds and pension death benefits to be included within the value of a person’s estate for inheritance tax (IHT) purposes from 6 April 2027.  In the 2026 Budget, the Government announced that it will be making a couple of technical amendments to this legislation in the Finance Bill 2026-27.   

• The first amendment will allow a prospective personal representative to direct pension scheme administrators to pay the IHT due directly to HMRC when certain conditions are met. This looks to be a welcome change, addressing a known wrinkle in the existing legislation where there was a disparity in the treatment of personal representatives and prospective personal representatives.  

• The second will be to update the IHT charitable giving condition to create a new, separate component for pension funds. This will allow those administering an estate to decide whether notional pension property is included in the ‘general’ component of the estate or as a separate component when calculating whether the estate meets the conditions to access the reduced 36% rate of IHT for charitable giving. 

These changes will take effect from 6 April 2027.

• Pension access for those with a terminal illness 

The Budget contained the promised amendment to the definition of terminal illness for pensions access, which had previously been announced by the Pensions Minister. We have now had confirmation that the change will be effected through the Finance Bill 2026-27, meaning we can likely expect the amendment to come into force next April. 

The change is designed to harmonise the definition with the position for social security benefits and the Government has confirmed that serious ill-health lump sums (enabling a total conversion of pension benefits into a lump sum payment) will be payable where scheme administrators receive written medical evidence that a member can be reasonably expected to die within 12 months. This is a subtle but important adjustment, incorporating a reasonableness test which medical professionals and pension scheme managers/trustees will welcome. 

The definition of ‘registered medical practitioner’ will include a wider range of medical practitioners who may provide the required medical evidence, including overseas registered medical practitioners.

The Pensions Minister also previously confirmed the Government will engage with pension providers and other stakeholders on the framework for payment of lump sums where a member has a terminal illness, and we may therefore see further changes to come. 

This is another area where schemes will need to review their scheme rules to check whether the amended definition will track through automatically when it comes into force. If not, the scheme rules in relation to when a member’s benefits can be commuted for terminal illness may need to be updated to match the amended requirements to qualify as a serious ill health lump sum.

• DC developments

DC Consolidation and Retirement CDC

The Government reiterated its commitment to the consolidation of defined contribution schemes, the introduction of the guided retirement framework and retirement-only collective defined contribution (CDC) pension schemes. 

In terms of specifics, they have said they will look to expand the circumstances in which a member retains certain protections following a transfer. They have also committed to enabling member flexibility to transfer from retirement CDC to a drawdown arrangement within a specific timeframe. In both cases legislation will follow in the 2027/28 Finance Bill so a slightly lengthier time horizon for these changes. As we go to press on this article, HMRC have just published Newsletter 186 which contains further information on the Government’s proposals in these DC reform areas, the details of which we will cover in a future update. 

We are also expecting further developments in both areas in the short term. The Government’s Roadmap for workplace pensions reform envisages publishing both (a) a consultation on draft regulations to implement retirement-only CDC arrangements and (b) a DWP policy consultation and FCA discussion paper on Guided Retirement before the end of this year.

Investments

In the Budget, the Chancellor referenced the Mansion House Accord potentially unlocking a further £25bn of investments into UK private markets and announced that the Government will work with pension providers to accelerate investment in fast-growth firms. But what does this mean? The Red Book doesn’t provide much in the way of further detail, with a single paragraph advising that “the government will work with pension providers, asset managers and the wider industry to build on existing commitments, accelerate the deployment of capital into innovative, scaling businesses, and support the UK’s scale-up ecosystem”.

It’s safe to conclude that the Government continues to have pension scheme assets in its sights as a mechanism for reinvigorating UK private market investment. As a reminder, under the Mansion House Accord 17 of the country’s leading pension providers expressed their intent to invest at least 10% of their assets in private markets (5% in UK private markets) by 2030. This voluntary commitment is underpinned by the “backstop” power in the Pension Schemes Act 2026, enabling the Government to pass regulations to compel schemes used for auto-enrolment to hold a minimum percentage of specified qualifying assets. 

Some progress towards those targets has already been made, as revealed by recent figures from the ABI and Pensions UK – as at 31 Dec 2025 the schemes held £22.1bn across private markets (split around 50/50 between UK and non-UK markets). However, there remains particular progress still to be made in relation to UK private equities where holdings across the 17 signatories are only £0.5bn (in the context of a total investment in private equity of £2.9bn). As many in the industry have expressed previously, a well-packaged pipeline of investible assets will be critical in order to facilitate schemes meeting this target.

• DB developments

Surplus payments to members

Within the Budget policy papers, there was a reminder of the previously announced policy change on surplus payments to members in a defined benefit (DB) scheme. As announced at Autumn Budget 2025, the government will introduce legislation in the Finance Bill 2026-27 to enable DB occupational pension schemes to make direct payments of surplus assets to members, where permitted by scheme rules and subject to trustee discretion. 

These authorised member surplus payments will be taxed as pension income where specified conditions are met, including requirements that the member has reached Normal Minimum Pension Age, with any awards of surplus before this date being held within the scheme as a deferred payment until NMPA. The change will take effect from 6 April 2027.

• Local Government Pension Scheme changes

In the 2025 Budget, the Government announced that it would “amend Stamp Duty Land Tax (SDLT) rules, so property transferred within Local Government Pension Schemes (LGPS) are subject to an SDLT relief”, and that this would be legislated for in the 2026/27 Finance Bill. 

The purpose of the new relief is to ensure LGPS funds are not subject to an unnecessary additional tax burden as a result of complying with mandatory asset pooling requirements under Fit for the Future policy and the resulting requirements of the Pension Schemes Act 2026.

A policy paper and draft legislation have already been published on 13 July 2026 setting out that the new SDLT relief will apply in relation to transfers of land and property from LGPS administering authorities to “qualifying pooled investment vehicles” established or operated by LGPS asset pool companies. In the 2026 Budget, it was confirmed that this new SDLT relief would come into force for transactions on and from 28 October 2026, notwithstanding that the legislation is not yet in place (this will be included in the Finance Bill 2026/27 as originally promised). 

• What was missing from the Budget?

There were a number of areas which have been subject to speculation on which the budget was silent:

• Changes to tax-free cash allowances: This is always a hot topic of speculation before a budget, and given the tax-free cash lump sum is perhaps the most valued and best understood aspect of pension benefits, it makes it politically sensitive to change.
• Tax on pension contributions: The Chancellor steered clear of making changes to the tax relief on pension contributions enjoyed by members, following speculation ahead of prior budgets of a potential move to ‘flat basic rate’ tax relief in place of the marginal rate relief currently in place.
• Salary Sacrifice: Significant changes to salary sacrifice arrangements were announced in the 2025 Budget. However, the new £2,000 cap on the amount of pension contributions that will benefit from NICs relief is not due to come into force until April 2029 and some will have been hoping for a re-consideration of the shape and quantum of the cap.
• Frozen allowances: With all eyes on the increased pensions tax allowance for those in receipt of the state pension, there are a number of other pensions tax allowances which have not increased for a number of years leading to fiscal creep. One example being the lump sum allowance (introduced in April 2024 following the abolition of the lifetime allowance) which was fixed at 25% of the LTA at the date of abolition at £268,275. Many will be relieved that this has not been reduced as a method of increasing tax receipts, but a fixed cap of this nature will continue to be eroded over time without any mechanism for increase or review.
• DB surplus payments to employers: Although we’ve already had the April 2024 surplus tax rate reduction (from 35% to 25%), we did wonder if the Chancellor might look again at taxation of surpluses returned to employers from defined benefit schemes. With the legal changes designed to give more schemes the option of making payments from surplus to employers due to come into force in April 2027 (with a view to making it easier for schemes to run on, invest productively and generate surpluses to share), is there a missed opportunity here to provide a further fiscal incentive to schemes that might be considering run on? 

Next steps

As highlighted above, there are some helpful administrative easements for schemes in this year’s Budget, for which legislation will follow in the 2026/27 Finance Bill. In order to ensure that schemes are able to take advantage of these changes, a review of the scheme’s governing documents will be needed to establish whether any rule amendments are required – particularly in relation to the removal of the “two-year tax rule” for death benefit payments, and the change to the rules around when serious ill health lump sums can be paid. 

For further information and background on some of the key pensions measures, you can access relevant policy papers, published alongside the core Budget 2026 documents, as follows:

• State Pension – tax allowance
• Two-year death benefit removal
• Collecting tax on excess lump sum death benefits
• Inheritance Tax technical changes
• Terminal illness pension eligibility change
• Surplus payments to members in a DB scheme

This article was written by Rachael Skuse. Thanks also to Louise Pettit for her insights.