Budget 2026 and your pension: what changes for retirement and inheritance

The Budget has three changes for people saving for retirement, drawing a pension or planning what they leave behind. One is new, one is a welcome simplification and one, announced earlier, is now only months away.

The Pension Tax Allowance

From 6 April 2027 until 5 April 2030, pensioners whose total income is no more than the full new State Pension will not have to pay small amounts of income tax caused by the State Pension rising above the Personal Allowance. HMRC will apply the allowance automatically to people over State Pension age.

Death benefits: the two-year rule goes

Until now, a tax-free lump sum death benefit could become taxable if it was paid more than two years after the member died. For payments on or after 28 October 2026, that rule is removed.

Inheritance tax on pensions from April 2027

As announced at Autumn Budget 2024, most unused pension funds and death benefits will be counted in the value of an estate for inheritance tax for deaths on or after 6 April 2027. Death in service benefits from registered schemes stay outside. The government estimates around 10,500 more estates will pay inheritance tax as a result, with the average bill rising by about £34,000.

What to review

• Your expression of wishes with each pension scheme.
• Whether to draw on pensions or other savings first, now that pensions count for inheritance tax.
• Lifetime gifts from surplus income, which can fall outside your estate.

The Budget also refers to a cap, announced at Budget 2025, on the pension contributions that can be made through salary sacrifice. Employers should check how it affects their schemes before it starts.