Andy Burnham and John Healey have confirmed seven key state pension and private pension rules that will remain unchanged under their leadership, despite significant reforms to private pensions taking effect from April 2027.
The Labour pair, with Mr Healey as the new Chancellor replacing Rachel Reeves, will oversee changes that bring most unused pension funds and pension death benefits into inheritance tax (IHT) calculations. This marks a major shift for pension beneficiaries, as death benefits that were previously outside the estate will now be included when calculating IHT.
State Pension Guarantees: Triple Lock and Income Tax Exemption
Two state pension rules are set to stay: the Triple Lock and the exemption from income tax for those living solely off Department for Work and Pensions (DWP) payments. Mr Burnham has vowed to adhere to the manifesto and keep the Triple Lock, which guarantees a state pension increase next year.
The Triple Lock raises the State Pension every April by the highest of inflation, average earnings growth, or a flat 2.5%. This commitment comes despite fiscal pressures, with the Institute for Fiscal Studies estimating the Triple Lock costs the Government between £12 billion and £12.6 billion per year.
Private Pension Changes: Lump Sum and Withdrawals
When first accessing a defined contribution pension, individuals can take a pre-commencement lump sum (PCLS) tax-free, which is 25% of the lower of the pension value and the available lump sum and death benefit allowance (LSDBA). In most cases, the LSDBA is £1,073,100.
Other withdrawals remain subject to income tax at the marginal rate, with PAYE applied at source. These rules apply to pensions accessed from April 2027 onwards.
State Pension Tax: Personal Allowance Freeze Extended
Every April, pensioners see their state pension rise by the highest of earnings, inflation, or 2.5%. However, the tax system remains frozen, as the personal allowance of £12,570 was frozen by Rishi Sunak in 2021 and extended by Rachel Reeves to 2031. Mr Burnham has decided to continue this policy.
Death Before 75: Tax-Free Pensions
For defined contribution pensions, if death occurs before the 75th birthday, pension beneficiaries can draw on the fund tax-free. In contrast, if death occurs at age 75 or older, beneficiaries face income tax at their marginal rate when accessing residual funds.
If the pension was not fully crystallised before death, beneficiaries may still draw a 25% tax-free PCLS to the extent the LSDBA had not been fully utilised.
Defined Benefit Schemes and Death in Service
For defined benefit schemes, dependents' pensions are taxed regardless of when the scheme member dies, although part of any lump sum (the balance of the member's remaining LSDBA) can be paid tax-free. Death in service payments remain tax-free.
These clarifications come as Mr Healey takes on the role of Chancellor, with NIESR warning that the Government will face pressure from persistent inflation due to geopolitical tensions, including the war between the United States and Israel with Iran.
