2 upcoming pension changes and what they could mean for your retirement

Over the next few years, changes to pension legislation could alter the way many people approach their retirement savings.

While the earliest change isn’t set to be introduced until 2027, you may be able to take steps in 2026 to prepare for the new rules and mitigate the impact on your finances.

Read on to learn about two upcoming changes to pension legislation and what you could do now to prepare.

1. Unused pension pots will be subject to Inheritance Tax from 2027

At the time of writing, you can typically leave savings held in a discretionary pension scheme to a loved one without the funds being subject to Inheritance Tax (IHT) when you pass away.

However, this rule is expected to change from 6 April 2027, with unused pension pots set to be included in IHT calculations. Here are some questions that may spring to mind.

How will Inheritance Tax apply to my pension?

Under new legislation, any funds in your pension pot when you die will be counted in your estate for IHT purposes. This will apply regardless of whether you die before or during retirement.

Death benefits offered by your pension provider may also be subject to IHT under the new rules.

Generally, IHT will only apply if your estate exceeds your nil-rate band. As of 2025/26, your nil-rate band is usually £325,000, or £500,000 if you leave a primary residence to a direct descendant (meaning your estate benefits from the £175,000 residence nil-rate band).

Any assets over your nil-rate band are typically charged IHT at a rate of 40%.

If you’re married or civilly partnered, your spouse generally won’t be charged IHT when inheriting your assets. This includes pension funds, so you could still leave your pot to your spouse tax-free.

How will the change impact my pension savings?

Historically, pensions have sometimes been used to pass wealth on tax-efficiently. In some cases, savers may have paid more into their pension than they planned to spend in retirement, with the intention of leaving the rest to loved ones without it being subject to IHT.

While pensions continue to offer tax-efficient benefits for growing your retirement savings, the upcoming changes will largely remove their IHT advantages. As such, some may choose to divert their savings down a more IHT-efficient route.

However, beware of being overzealous with IHT mitigation strategies. Diverting too much away from a pension could see you fall short of your required income in retirement, as well as miss out on valuable benefits such as tax relief and tax-efficient investment returns.

What could I do now to prepare for the changes?

A comprehensive financial plan can help you balance both your retirement needs and IHT mitigation.

By working with a financial planner, you could create a retirement plan with clear goals and a strategy for building your savings. This can help you set aside the right amount for your ideal retirement lifestyle.

You could define an estate plan to help mitigate your IHT liability. A financial planner can support you to identify opportunities to pass on wealth tax-efficiently, while taking your broader financial needs into consideration.

2. Salary sacrifice will only be exempt from National Insurance for contributions up to £2,000 a year from April 2029

When salary sacrifice schemes are offered by employers, employees can choose to exchange a portion of their salary for the same value being added to their pension. This is known as “salary sacrifice”.

Because the sacrifice reduces your salary, these schemes can lower your National Insurance (NI) bill or you can choose to use this saving to provide an extra boost to your pension pot.

While, in 2025/26, there is no limit on the amount you can sacrifice (above the National Living Wage) in order to contribute to your pension through salary sacrifice. A proposed cap on the amount that can be sacrificed, and benefit from an NI saving, of £2,000 a year is set to limit the benefits of using salary sacrifice from 6 April 2029. Here are some questions you might be asking.

How will my pension pot be affected?

From April 2029, if you pay more than £2,000 a year into your pension via salary sacrifice, any contributions exceeding the cap will be subject to Class 1 NI contributions from both you and your employer.

Although these rates are subject to change in future, as of 2025/26, the employee Class 1 NI rates are typically 0%, 8% or 2%, depending on your weekly earnings.

As such, your pension pot could lose out on a significant boost if you are currently using NI savings on contributions over £2,000 a year to build your retirement savings.

Can I still sacrifice more than the £2,000 cap?

In some cases, employees may use salary sacrifice to reduce their taxable income. It is usually more convenient to receive all of your tax relief immediately rather than having to reclaim the excess over the basic rate from HMRC.

The government has stated that the cap is a limit on the amount of NI benefit you can derive from the schemes, but you can continue using salary sacrifice by more than the £2,000 cap if desired.

What steps could help mitigate the impact on my pension?

As it stands, many details about how the salary sacrifice cap will be applied remain unclear. However, while the changes won’t take effect until 2029, you can still take proactive action today to help boost your pension pot and mitigate the impact of the new cap.

The most appropriate steps for you will depend on a range of factors, from your income and pension setup to your preferred retirement age and ideal lifestyle.

By taking the time to evaluate your current pension savings and define clear retirement goals, a financial planner can help you create a strategy for growing your pension pot both before and after the cap is introduced.

Get in touch

To explore how we could support you to define a retirement plan tailored to your needs, get in touch. Email Marnel.Stafford@fosterdenovo.com or Ryan.Edwards@fosterdenovo.com, or call 07305 970959 or 0207 469 2800, to find out more about how we can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.