The recent UK pension reforms introduced in the Autumn Budget aim to improve investment efficiency and economic growth, however they come with many implications. The changes in pension legislation represent challenges and opportunities for business owners and directors. We have prepared a breakdown of the key points to help you.
Employer pension contributions
For company directors, extracting funds from the business through employer pension contributions may now be more appealing. Tax-free cash allowances remain as they are at 25%, despite rumours that the rate would be reduced in this latest budget https://bit.ly/497aohF.
Inheritance Tax (IHT) on pensions
Commencing in April 2027, unused pension funds on death will be deemed part of the estate, and as a result potentially liable for inheritance tax and income tax (double taxation). This could raise £1.5bn annually by 2030 for the government, according to official estimates https://bit.ly/4i38WAY. We will be keeping a close watch on how the final legislation takes shape.
Consolidation of pension schemes
The government plans to merge smaller pensions into larger “megafunds,” requiring schemes to demonstrate good investment performance, low fees, and quality service under a new government “value for money” framework https://bit.ly/3V6P1XS.
Businesses offering workplace pensions, particularly SME’s, will need to ensure compliance with these new standards, to avoid the risk of employee funds being moved to better-performing schemes. This could increase operational costs, particularly for directors managing auto-enrolment schemes or those tied to underperforming pension funds.
Opportunities for larger investments
For directors and owners, particularly those with significant holdings in their companies’ pension schemes, consolidated “megafunds” present some opportunities. They are expected to invest more resources in UK infrastructure and growth sectors, potentially offering higher returns and benefiting growth-oriented businesses, especially in technology, renewable energy, and infrastructure https://bit.ly/495mbwN.
Planning for directors’ pensions:
Directors using Self-Invested Personal Pensions (SIPPs) or similiar schemes may need to adapt, as niche investment options may reduce under the focus on high-performing funds. We are advising company directors to seek advice to ensure their pension investments, remain both competitive and compliant under the new rules.
Planning for the future economic outlook
Since October 30th, increased employer NI contributions, minimum wage hikes, and fewer tax loopholes are adding to the financial pressure on UK businesses. It is the time to proactively adapt to the new pension rules to stay compliant and optimise financial outcomes for owners, directors, and employees.
However, the recent reforms do aim to unlock £80 billion for businesses operating in, what Rachel Reeves refers to “productive assets”, potentially benefiting businesses in high-growth sectors https://bit.ly/3OrT2Tb. Therefore, while reforms add compliance and admin burdens, they also create opportunities for higher returns and improved access to capital, especially for businesses in these growth-oriented sectors.
We continue to advise our clients that proactive planning is essential for businesses to navigate the changing pension landscape, and leverage opportunities for growth.to ensure the best outcome for owners, directors and employees.