John Healey had kept a tight lid on the Budget until a few days before his speech. On pensions, the chancellor announced just a few patches for immediate issues, saying that the Pensions Commission is due to report in February.

A new tax allowance for state pensioners from April is perhaps the biggest pensions change in this Budget, although the intention to bring in a policy on state pensions and tax was announced a year ago.

"For pensioners, I am delivering the new Pension Tax Allowance – so that pensioners with income up to the value of the full new State Pension will not pay income tax in this parliament," Healey said on Wednesday as he delivered his Budget speech. 

The income tax threshold is frozen at £12,570 until 2031, while the state pension continues to increase. This means some low-income state pensioners might have become taxpayers for the first time in April, with HMRC having to collect small amounts. To avoid this, and possibly the tabloids' reaction to anything affecting the finances of pensioners, the government has introduced a new pension tax allowance – which is more generous than expected, costing a projected £250m by 2031-32. 

At last year's Budget, former chancellor Rachel Reeves said that people only in receipt of the basic or new state pension will not have to pay small amounts of tax through Simple Assessment from April 2027, implying that those receiving income from other sources would. 

Instead, the government has now said that the higher income tax allowance for older people "applies regardless of where your income comes from, whether that is the State Pension, a private pension, earnings from work, self-employment income, savings, property or dividend income, or a combination of these".  

The inclusion of other income comes after some in the industry had warned about unfairness towards those who had been saving.  

The pension tax allowance will increase with the state pension in this parliament, and there is no immediate cliff-edge, as the tax break tapers from the current value of the full new state pension of £13,037 up to £13,319. 

 

Pensions UK welcomed the tax break for low-income pensioners. Chief policy officer Zoe Alexander said: “The State Pension provides the foundation of retirement income. Protecting the incomes of those most reliant on it is consistent with the wider objective of improving retirement adequacy.” 

Others were also supportive but keen that the system is not made too complicated. Patrick Heath-Lay, chief executive for master trust People's Pension, said: "It’s important that these changes don’t overcomplicate how the State Pension works and how it links to private pension saving. The mechanisms behind this proposal will be key to maintaining simplicity for retirees of today and tomorrow.” 

Becky O’Connor, head of pensions at provider PensionBee, said sparing pensioners the hassle of being chased by HMRC for small tax bills was welcome but added that it "does nothing for the carers, disabled people and others with gaps in their National Insurance record whose State Pension is already too low to be taxed, and with the allowance due to end in 2030, it’s a temporary fix". 

In addition, a new age-related tax allowance raises questions about equality, O'Connor warned: “This may also give rise to a potential intergenerational fairness issue – people of working age earning £13,000 will pay income tax, whereas those above State Pension age will not.”  

Royal London's director of policy, Jamie Jenkins, suggested that the days of politically painless tax rises through perpetually frozen thresholds seem to be nearing an end.  

  

"For example, as the State Pension rises above the Personal Allowance, the idea of a 'stealth tax' somewhat loses its stealth," he said. "This leaves a complex set of arrangements to protect those on the lowest incomes from the somewhat odd scenario of having to pay back in taxes some of the money provided by the state as a benefit." 

 

 

The pension tax allowance is not the only pensions news in the Budget. Emphasising investment to achieve growth, Healey said: "In today’s Budget, I’m boosting investment through our Public Financial Institutions. A further £20.4bn for the National Wealth Fund and the British Business Bank over the coming years, supporting 140,000 jobs. And I will work with pension providers, asset managers and the wider industry to accelerate more private investment into Britain’s innovative, fast-growth firms." 

The government noted that "the Mansion House Accord should unlock around £25bn of additional investment into UK private markets", saying it 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". 

Pensions UK welcomed the extra £20.4bn of support for the National Wealth Fund and British Business Bank. 

  

“Public finance institutions have an important role to play in using public capital to crowd in significantly greater levels of private investment, including from pension schemes," said Alexander. “The priority now must be turning this additional capacity into a stronger pipeline of commercially attractive projects and scalable investment vehicles that pension funds can invest in.” 

 

The Investment Association's chief executive John Owen agreed that a stronger pipeline can help mobilise private capital and support productive investment. 

 

However, he called this Budget a missed opportunity to end stamp duty on shares. Owen said: "The UK’s chilling tax on shares makes investing in British businesses more expensive and acts as a direct disincentive to invest in them. At a time when the UK is fighting to attract and retain listed businesses, we should be removing barriers to investment, not maintaining them. For a government that says it is serious about growth, it is high time that this counterproductive tax was abolished." 

Some changes are being made to enable the consolidation of defined contribution schemes and the introduction of the guided retirement framework and retirement-only collective DC. This will include expanding the circumstances when a member can keep certain protections following a transfer and allowing members to transfer from an RCDC pension to a drawdown arrangement within a set timeframe.  

"Simplifying scheme consolidation is crucial to the success of Guided Retirement and the government’s wider pensions ambitions," commented Renny Biggins, head of policy long-term products and savings at the Investment and Saving Association. 

 

"Equally, retirement is not one-size-fits-all, so allowing members of Retirement CDC arrangements to move into drawdown within a defined timeframe preserves important flexibility. Modernising outdated pension protection rules on transfers should also remove unnecessary obstacles," he said.  

For the Local Government Pension Scheme, the Treasury is providing Stamp Duty Land Tax Relief for the pooling of LGPS debt assets in England and Northern Ireland, to support LGPS reforms. The relief will be available on transactions from 28 October this year to 1 April 2032. 

The government is also removing the two-year rule on the tax treatment of death benefits from Wednesday. This rule previously meant that any death benefits to families of members who died before age 75 were free from income tax if they took the payment within two years. 

Severe administration failures at the Civil Service Pension Scheme, one of the largest in the UK, mean some bereaved families risked waiting more than two years for death benefits through no fault of their own. In early October, the chair of the Public Accounts Committee wrote to Cabinet minister Louise Haigh demanding that she clarify the tax position of bereaved families in regard to CSPS, saying “it is unconscionable” that the families of civil servants could potentially face such a financial penalty. The removal of the two-year limit might be intended to prevent such further harm at CSPS. 

 

   

David Brooks, head of policy at consultancy Broadstone, said the removal of the long-standing two-year rule for death benefits was particularly welcome.  

 

“Death benefit cases are often among the most sensitive and complex matters schemes deal with, and the previous rules could produce outcomes that felt difficult to justify where delays arose through no fault of the beneficiaries involved. The change is therefore a rare example of a reform that appears to improve both fairness and administrative simplicity, and is likely to be warmly received by trustees, administrators and members alike,” he said. 

 

However, some trustees warned of the practical implications. Client director at Zedra Governance, Alastair Meeks, said the change is welcome but noted that the two-year time limit "is hard-coded into most pension scheme rules, so trustees will need to get their rules amended before they can relax".  

 

He said the time limit can sometimes even be helpful: "It can help focus the minds of family members who have been avoiding thinking about it. Trustees will need to use different techniques to get such family members to engage.” 

 

Meeks noted that abolishing the time-limit sits at odds with the stringent six-month deadline for paying inheritance tax, as pensions will be subject to IHT from April next year. 

  

Elsewhere, the government will also make changes to the way tax is assessed and collected where a deceased member’s lump sum death benefit allowance has been exceeded, "to provide greater certainty to individual beneficiaries". 

Such amounts will no longer be treated as pension income. HMRC will instead calculate and collect a separate tax charge at the recipient’s marginal rate of income tax, to avoid reopening people's wider tax and income-related benefits position, potentially several years after the payment was received. The change will apply retrospectively for lump sums paid from 6 April 2024, with transitional provisions for the 2023-24 tax year. 

In addition, the taxman's definition of terminal illness for the purposes of accessing pensions is being updated to make it easier for terminally ill people to receive their pensions savings and to allow for overseas registered medical practitioners to provide medical evidence.  

The Treasury has given in to demands by the trustees of the Mineworkers' Pension Scheme and the British Coal Staff Superannuation Scheme that all surplus should go to them. The two pension funds that are backed by taxpayers previously had to give half of any surplus with the Treasury. Reviewing this arrangement was a Labour manifesto commitment. 
 

"For ex-mineworkers, I’m guaranteeing that every penny of the pension fund surplus now goes to miners. I know the job’s not done and I will go on to ensure the full transfer of the Guarantors Fund," said Healey. 

Scrapping the old sharing agreement means the BCSSS will in future produce valuations that show any surplus or deficit, and the trustees can use all surplus to increase members' pensions. 

However, at the MPS, the trustees said that in a meeting on Tuesday, the government told them that it would not allow the MPS to use £1bn of undistributed surplus "currently locked up in the scheme" to pay members a new bonus pension this year. The £1bn from earlier surpluses had been earmarked to be paid to the government.  

"The trustees' position is that the work has been done and that the undistributed surplus funds should be transferred to members now without further delay. The trustees feel strongly that, once again, MPS members are not being treated equally and are receiving a second-class deal," they said.