With everything that’s going on in the financial world — especially following the Labour Autumn Budget 2024 — it’s no surprise that many people are wondering: should I stop paying into my pension?
One of the key takeaways from the budget is that UK pension pots will form part of your estate for Inheritance Tax (IHT) purposes starting from April 2027. This has sparked concern, and understandably so. However, making decisions about your pension should be based on your personal financial situation, not just broad policy changes.
Get a detailed breakdown of the current pension landscape and practical tips in our latest video. We walk you through what the new pension rules mean for you, how they could affect your inheritance planning, and why stopping your pension contributions may not be right.
Why Are Pensions Schemes Still Tax Efficient?
Pension schemes remain one of the most tax-efficient tools available while you're working. Pensions allow you to take advantage of salary sacrifice — a strategy where both employer and employee contributions are directed into your pension scheme before tax is calculated. This reduces your overall taxable income and helps you save more effectively for retirement.
To bring this to life, here’s an example of our client, He earns £146,000 annually and chooses to sacrifice £46,000 of that into his pension. Why? Crossing the £100,000 income threshold significantly increases your tax burden — potentially resulting in an effective 60% tax rate.
He uses pension contributions to strategically stay below that threshold, preserving his allowance and reducing unnecessary tax leakage.
What About the 60% Income Tax Rates and Personal Allowances Tax Band?
A lot of people get confused about this 60% Tax Band in the UK. The standard Personal Allowance is £12,570, and it’s not applied to your entire income where your personal allowance gets tapered away. How much Income Tax you pay in each tax year depends on:
- How much of your income is above your Personal Allowance
- How much of your income falls within each tax band
Making pension contributions can effectively shield this portion of your income and bring you back under the limit. So, when used properly, pensions remain a smart, forward-thinking way to manage your income — even if new tax rules are on the horizon.
Should You Be Worried About Inheritance Tax on Your Pension?
As of now, pension contributions are capital gains tax-free and inheritance tax-free. But come April 2027, any unused pension pot may count towards your estate for IHT purposes. That change has understandably made people nervous.
In reality, the chances of passing away right as you retire are relatively low. Most people live for many years into retirement and will spend down their pension over time. Life expectancy continues to improve, and while health and circumstances can change, it’s not automatic that your pension will become part of your estate.
The key here is understanding your timeline and planning about how and when you’ll draw from your pension. If you’re still working and earning, the question isn’t whether you can contribute — it’s whether you should. And the answer is: probably yes, especially when you consider the tax savings, employer contributions, and long-term compounding.
We can work with you to review how much of your £60,000 annual pension allowance you’ve used, what your current contributions look like, and whether you’ve taken full advantage of what’s available.
Have You Used Your Carry Forward Allowance?
Many people don’t realise they can carry forward unused pension allowances from the past three tax years. The carry forward rule allows you to use any unused pension annual allowance from the previous three tax years, as long as:
- You were a member of a UK-registered pension scheme during those years (even if you didn’t contribute much).
- Your total contributions — including any employer contributions — do not exceed your relevant earnings in the current tax year.
If you’ve got extra capital — maybe £100,000 or £200,000 just sitting in savings — you could invest it into your pension using carry forward rules and supercharge your retirement savings while enjoying substantial tax relief. This is especially valuable for high-income earners who haven’t consistently maxed out their allowances in previous years.
Final Thoughts: Is Your Pension Contribution Still Working for You?
The decision to continue contributing depends on your financial situation, tax planning goals, and long-term strategy. If you are still working and earning, pension contributions remain one of the best ways to build wealth in a tax-efficient manner. While the 2027 IHT changes are significant, they don’t necessarily mean you should stop contributing to your pension. On the contrary — when used wisely, they remain one of the most powerful tools to build wealth, reduce taxes, and secure your future.
So whether you’re contributing regularly or thinking of hitting pause — get the facts, get a strategy, and take care of your UK Pension Assets!
Book a free, no-obligation call using the link below. We’ll talk through your current setup, answer your questions, and help you make confident, informed decisions about your pension strategy.