Pensions Bulletin 2026/44 - Budget Special

This Budget Special summarises and comments on announcements made in the 28 October Budget which are of potential relevance to pension schemes and their members. For our regular weekly update see Pensions Bulletin 2026/43. 

Although the Budget contains numerous pensions-related measures, there are no major pensions surprises and several helpful changes. One area that stands out is the new pensions tax allowance, which whilst welcome for many pensioners, adds yet another extra layer of complexity to the pensions tax system.  

New pension tax allowance for those on low incomes who have reached SPA

The Chancellor has announced the introduction from 6 April 2027 of a new Pension Tax Allowance for individuals who are aged above state pension age (SPA) (or reach SPA within the tax year). The full allowance will be available where total income does not exceed the full annual value of the new state pension, with a tapered allowance available for some individuals with income above that level. This allowance will apply regardless of whether the income is from state pension, a private pension, earnings from work, self-employment income, savings, property or dividend income, or a combination of these. The individual does not have to be receiving or entitled to the state pension.

This follows the Government announcement at the November 2025 Budget that, from 2027/28, pensioners whose sole income is the state pension would not have to pay small amounts of income tax through Simple Assessment (see Pensions Bulletin 2025/48). Ministers subsequently confirmed that pensioners in this position would not have to pay income tax for the remainder of the current Parliament. The mechanism for delivering this commitment was left open.

The change follows the continued freezing of the standard personal allowance at £12,570, currently due to last until April 2031, while state pensions continue to increase under the triple lock (due to be adjusted from April 2030 – see Pensions Bulletin 2026/39). The full rate of the new state pension will rise from £12,547.60 a year in 2026/27 to £13,036.40 in 2027/28, exceeding the standard personal allowance by £466.40. Without any change, this would result in an annual income tax liability of around £94 for a pensioner whose only income is the new state pension.

The intention is that under the new arrangements, those eligible will pay no income tax if their income is within the full annual value of the new state pension. The Pension Tax Allowance (which is a reduction in income tax liability, rather than an increase in the tax-free personal allowance) will then also apply where income is slightly above this level, reducing by £1 for every £3 of income above it. This means that for the tax year 2027/28 those with income less than £13,319 will pay less income tax than they otherwise would. The allowance will apply automatically and increase in line with future increases in the state pension for tax years 2028/29 and 2029/30, with arrangements beyond April 2030 kept under review.

The explainer helpfully includes some illustrative examples and many FAQs to illustrate how the new allowance will operate in various circumstances. 

Abolition of the two-year pension death benefit rule

Currently, following a death before age 75, lump sum death benefits (or funds designated for beneficiary drawdown) must be paid within two years after the pension scheme administrator first knew, or could reasonably have been expected to know, of the member’s (or beneficiary’s, where applicable) death to escape adverse tax consequences. This will no longer be the case for payment made on or after 28 October 2026. The Government will introduce legislation in Finance Bill 2026-27 to remove the two-year rule.

This will mean that tax-free pension and lump sum death benefits will no longer become taxable solely because the two-year rule is missed. The change will apply both where a payment would otherwise be taxable as pension income of the recipient and where it would otherwise be subject to the special lump sum death benefits charge. 

New mechanism for taxing excess lump sum death benefits

A “practical, standalone process” for assessing and collecting tax due on certain lump sum death benefits is to be introduced in Finance Bill 2026-27. 

Where a member dies before age 75 and relevant lump sum death benefits exceed their available lump sum and death benefit allowance, the excess will no longer be treated as pension income of individual beneficiaries. Instead, each beneficiary will face a separate tax charge on their portion of the excess, calculated by reference to their marginal rate of income tax for the tax year in which the lump sum was paid. 

Consequential amendments will preserve the existing income tax relief where the benefit is subject to both inheritance tax and income tax and ensure that any refund of inheritance tax will be brought into charge appropriately. 

The new mechanism will apply retrospectively to relevant payments made on or after 6 April 2024, with transitional provisions applying the same approach to relevant payments made in 2023/24. The inheritance tax charge will apply to deaths on or after 6 April 2027. 

Budget confirms tax framework for member surplus payments

The Budget documents confirm that legislation will be introduced in Finance Bill 2026–27 to allow DB occupational pension schemes to make direct surplus payments to members, where permitted by scheme rules and subject to trustee discretion. 

This follows the publication of draft legislation in July (see Pensions Bulletin 2026/28). Under this framework, qualifying “authorised member surplus payments” will be taxed as pension income, provided specified conditions are met. These will include requirements relating to the scheme’s funding position and the member having reached normal minimum pension age or, where applicable, their protected pension age. In addition the scheme must not have triggered wind-up. The legislation will also contain (unspecified) safeguards against avoidance. 

The changes will take effect from 6 April 2027. 

Tax changes to ease DC consolidation and retirement pathways

The Government has announced that it will amend pension tax legislation to support DC consolidation, Guided Retirement and Retirement-only Collective Defined Contribution (R-CDC) schemes through Finance Bill 2027-28.

The intended changes include:

• amending the conditions under which members can retain pension age or lump sum protections when transferring between schemes;
• allowing members who have started receiving an R-CDC pension to convert it to a drawdown pension within a specified period, where the R-CDC scheme chooses to offer this option; and
• allowing transfers from drawdown funds into R-CDC schemes.

Government to ease pension access for terminally ill members

The Government has announced changes to the pension tax rules intended to make it easier for terminally ill savers to access their pension savings. This follows on from the Government’s commitment to review these rules after a House of Lords debate in June (see Pensions Bulletin 2026/27), which highlighted concerns about inconsistent current approaches and appropriateness of medical certification. 

The new test will allow a serious ill-health lump sum to be paid where the member “can be reasonably expected to live for less than a year”. The change will apply to uncrystallised rights, whether the member is under or over age 75. The changes do not make all such payments tax-free: tax treatment continues to depend on age and available allowance, with payments at age 75 or above remaining taxable as pension income. The legislation will also amend the definition of a registered medical practitioner, allowing a practitioner based outside the UK to provide evidence of a terminal diagnosis where the member lives in the country in which that practitioner practises. 

Both changes will take effect on Royal Assent of the Finance Bill 2026–27.

Technical changes to pensions inheritance tax rules

The Government will introduce legislation in Finance Bill 2026–27 to allow prospective personal representatives, subject to conditions, to direct pension scheme administrators to pay inheritance tax due to HMRC.

Those administering an estate will also be able to choose whether pension property brought into the estate for inheritance tax purposes is included in the general component of the estate or treated as a separate component when calculating eligibility for the reduced inheritance tax rate where part of the estate is left to charity. A reduced rate of 36% applies if 10% (or more) of the net estate is donated to charity. This amendment appears to enable such an arrangement made based on the estate (excluding pensions) still to benefit from the reduced rate (although we assume the reduced rate would not apply to the pension benefits).

Both changes will take effect from 6 April 2027.

And in other news…

• Mansion House Accord – The Government commits to working with pension providers, asset managers and the wider industry to build on existing commitments under the Mansion House Accord and accelerate investment into innovative, scaling UK businesses. The Budget reiterates that the Accord is expected to unlock around £25bn of additional investment into UK private markets.
• New State Pension – As part of the explanation on how the Pension Tax Allowance will be calculated, the Budget documents confirmed that the new State Pension will be increased from £12,547.60 pa to £13,036.40 pa for 2027/28. The Department for Work and Pensions is expected to publish a policy paper setting out all the benefit and pension rates for 2027/28 in the coming days.
• Savings income tax – from April 2027 there will be a 2% increase to the basic, higher and additional rates of saving income tax, increasing them to 24%, 44% and 49% respectively. This is on top of the 2% announced at the 2025 budget which was also due to come into force from April 2027 (see Pensions Bulletin 2025/48).
• Clarification of tax treatment of certain social security benefits – the Government will be legislating in the Finance Bill 2026-27 to clarify the basis of taxation for some social security benefits. This will ensure that the relevant social security benefits are taxed on the accruals basis. The legislation will also remove or update references to obsolete and renamed benefits in Income Tax (Earnings and Pensions) Act 2003.
  
  The legislation will take effect from 6 April 2027. It is unclear at this stage which benefits the Government have in mind.
• National Insurance Contributions limits and thresholds – the Government has confirmed that the September inflation (CPI) increase of 3.5% will be used as the basis for uprating NIC limits and thresholds that are not currently fixed. This includes the Lower Earnings Limit sometimes used by occupational pension schemes in their calculation of contributions and benefits, which will increase from £6,708 pa to £6,916 pa for 2027/28. The Government will confirm these and other related rates and thresholds in early 2027.
• Changes to ISAs – A U-turn on limiting cash savings in ISAs as announced in last year’s Budget, a new First Time Buyer ISA replacing the Lifetime ISA for new savers from April 2029, and a reduced withdrawal charge for property purchases above the cap of 20% from 25%.
• National Living Wage and National Minimum Wage – From 1 April 2027 the National Living Wage and National Minimum Wage will both increase by 3.9% to £13.21 per hour (£11.27 per hour for 18-20 year olds).
• Pensions Commission timing – The Budget confirms that the Pensions Commission’s final report will be published in February 2027, recommending steps to ensure that the private pensions system delivers adequate, fair and sustainable retirement outcomes.
• Coal pension schemes – The Government will change the surplus-sharing arrangements for the Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme so that members receive 100% of surpluses generated by the schemes’ performance. It will also work with the trustees towards full transfer of the remaining Guarantor’s Fund.