Big pension developments to watch out for in 2025

Roughly 12 months ago I described 2023 as “a seminal year for pensions” – in no small part because then-chancellor Jeremy Hunt chose to scrap the controversial lifetime allowance (LTA).

At the risk of sounding like a broken record, changes to the landscape in 2024 were equally, if not more significant. Labour’s proposal to bring pensions into the scope of inheritance tax (IHT), which is causing an almighty stir, offers a case in point.

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The message here is that with every passing year, the retirement landscape is undergoing major shifts. And we can expect this trend to continue in 2025. The new government has big ambitions to shake up pensions to help people reach later life in ruder financial health, and some of its ideas are already in motion.

Let’s run through some of the key pension events and developments to look out for this year, starting with an area that most people hope is left alone.

No more changes to pension tax, please

Last year served up a roller coaster for pension taxation. When news broke in May 2024 that Labour had abandoned plans to reinstate the LTA, evidenced by the policy’s subsequent omittance from the party’s election manifesto, savers with large pension pots let out a collective sigh of relief.

The LTA, which capped how much your pension savings could be worth before facing hefty tax charges, had been officially canned just a few months prior. People were planning accordingly under the new rules, in some cases beefing up their pension savings for estate planning purposes.

However, we didn’t know at this point that Labour would reintroduce a cap of sorts on your pension savings. I am, of course, talking about the decision to bring unspent pensions into the scope of IHT, which could create tax bills far more painful than those imposed by the LTA. The difference here is that anyone inheriting the pension who isn’t a spouse or civil partner will foot the bill, rather than the saver. 

Whatever your opinion on the LTA or pensions being subject to IHT, this constant shifting of the goalposts risks inflicting long-lasting damage on saver sentiment. Reforms to pension tax have become so frequent, drastic and sometimes abrupt, that we have little idea what the rules will look like when we reach retirement.

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For these reasons, one would hope the pension tax system gets left alone for the next few years to bring some much-needed consistency.

Auto-enrolment contributions set to stay put

According to the Financial Times, Rachel Reeves has shelved a review of pension adequacy to avoid placing an additional burden on UK businesses, which are set to face higher national insurance (NI) bills from April.

This has dashed hopes that the minimum contribution levels under auto enrolment will be bumped up to support peoples’ future pension pots. This essentially means the current levels – if you pay 5% of qualifying earnings your employer must pay 3% – will remain in place for the foreseeable future, despite fears that these percentages are insufficient to achieve a comfortable retirement for millions of savers.

This will place added onus on individuals to engage with their retirement savings in 2025. Rather than rely on the government, we must all take control of our own retirements.

A good place to start is to find out the maximum your employer is willing to contribute to your pension, as not all companies stick to the minimums. You might have to match their percentage payment, but there is a strong incentive to do so as it’s effectively free money.

A further attraction with pensions is that you get tax relief at your marginal rate (in other words, the rate of tax you pay on the next pound you earn) on what you contribute. This feature is particularly appealing if you pay additional or higher-rate tax, as a £1,000 contribution effectively only costs you £550 or £600, respectively.

Launch of the DC megafunds

In her Mansion House speech, Rachel Reeves outlined proposals to radically improve the defined contribution (DC) pension market with the birth of megafunds. The chancellor described it as the “biggest set of reforms to the pensions market in decades”.

The idea is to consolidate defined contribution (DC) schemes and pool assets from local government pension scheme authorities to benefit from economies of scale, and unlock tens of billions of pounds by funnelling pension scheme money into UK infrastructure and private equity. Ministers believe this will boost people’s retirement savings and drive economic growth.

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A pension bill to be passed later this year will kickstart the project. However, it already has its critics, with concerns that it’s for pension schemes to decide where to invest their members’ money, and the government shouldn’t get involved. To be clear, the government hasn’t said that allocating a certain amount of scheme money to the UK will be compulsory. Not yet anyway.

Further clarity needed on pension IHT rules

The proposal to bring pensions into the scope of IHT isn’t due to take effect until April 2027. This affords those affected a couple of years to weigh up how it might impact their estate and determine whether it prompts a change of strategy.

In the meantime, the government must clear up some key aspects of the changes as soon as possible. A technical consultation on the policy runs until 22 January 2025, so all eyes will be on the outcomes. There is also some confusion around which types of pensions will be subject to IHT and which won’t. These must be clearly defined and communicated well in advance of the implementation date.

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I’ve seen growing opposition to the possible double taxation (income tax and IHT) scenario should death occur after age 75. A counter suggestion is to apply a single tax on death to avert an IHT reporting headache for estate executors and pension schemes and give savers a better idea about the potential tax implications of surplus pension savings on death. This makes a lot of sense in my view. Will the government take it on board? Seems unlikely, but we shall wait and see.

State pension to rise, WASPI fight continues

The state pension is never far from the headlines. In the latest development, the government opted not to compensate WASPI women (pictured above), despite the Ombudsman recommending redress of between £1,000 and £2,950.

WASPI, which stands for Women Against State Pension Inequality, was founded in 2015 to challenge the speed at which the state pension was equalised for men and women. The government’s recent payout snub proved a further blow to the campaign, but the fight and debate will spill into 2025.

Elsewhere, the state pension amount is set to rise a hearty 4.1% from April 2025. Under the treasured triple lock mechanism, which will remain in place for this Parliament but remains a thorny subject, the state pension uprates every year by the highest of inflation, average wage growth or 2.5%. The earnings figure is driving April’s hike.

This means the full state pension will increase to £230.25 per week (£11,973 a year), while the basic amount will rise to £176.45 per week (£9,175 a year) – welcome news for retirees, especially those out of pocket due to lost winter fuel payments.

Plans to narrow the retirement advice gap

One of the biggest consequences of the retail distribution review (RDR) – a piece of legislation introduced in 2013 that stopped financial advisers receiving commission for pension and investment advice, and increased their professional standards – has been the so-called advice gap.

For various reasons, only roughly 10% of the population takes financial advice every year. Most agree that’s far too low. However, solutions to bridge the advice gap have been in short supply and those that have tried to plug the hole have made little ground.

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The Financial Conduct Authority (FCA) in late 2024 launched the latest idea to tackle the problem, allowing firms to provide “targeted support” for savers. A couple of examples here are when firms identify someone who is drawing down on their pension unsustainably, or someone unsure about how to take a retirement income. At first glance, it seems a halfway house between doing it yourself and regulated advice.

Helping people to make sensible financial decisions is a laudable pursuit, but there is some rocky terrain to navigate. The boundary between advice and guidance is delicate. As there is varying recourse for consumers should things go awry, it’s essential that consumers understand the type of service they receive.

We can expect to hear more developments about “targeted support”, and how it will help savers and investors, during 2025.

First pension schemes to plug into the dashboard

The pension dashboard project has been in the works for some time. They will enable you to see all your pension savings securely in a single, online hub.

While pension dashboards are far from the silver bullet to help everyone knock their long-term savings into shape, they represent a giant leap forwards. Once they do go live, to get the most out of the dashboard it is essential to engage with them. They’re not much use otherwise.

The timetable for plugging into the dashboard ecosystem is staggered by scheme size. The largest must connect by April 2025, filtering down to the smallest by September 2026. We might have to wait until 2027 before consumers can begin to interact with the dashboard.

What we’re told is that the MoneyHelper pensions dashboard, being developed by the Money and Pensions Service, will be made available to savers before commercial dashboards go live.