If you've been following UK financial news, you will know the Autumn Budget 2024 brought significant changes that are set to impact pension planning.Inheritance tax and UK pensions have been in the spotlight. As you're probably familiar with by now, from April 2027, UK pension pots will form part of one's estate for inheritance tax planning in the United Kingdom. This aligns pensions with ISAs from an estate-planning perspective and forces many to re-evaluate their retirement strategy. (HM Revenue & Customs, 2024).
To fully understand how these pension advantages—like employer contributions, tax-free growth, and salary sacrifice—can be used to your benefit, we’ve put together a detailed walkthrough on our YouTube channel. It’s packed with practical examples and clear explanations to help you make informed decisions about your retirement strategy.
Are UK Pensions Still a Good Investment?
If you’re in your 50s or 60s, chances are you’ve already built up a decent pension pot. Even with the upcoming inheritance tax rule changes, pensions remain one of the most tax-efficient ways to manage and grow your retirement wealth.
1. Employer Contributions
If you’re still working, your employer may be matching your contributions — essentially giving you free money toward your retirement. Even a small match adds up significantly over time.
2. Tax-Free Growth
Your pension investments grow free of capital gains tax, meaning you’re not taxed on profits as the value of your pension increases. This makes pensions a powerful compounding tool.
3. Salary Sacrifice Opportunities
Salary sacrifice allows you to redirect part of your salary directly into your pension before tax is applied. This can reduce your taxable income, help you avoid high tax brackets (especially around the £100k mark), and maximise your take-home value over time.
Let’s have a look at a real case example from one of our clients:
Mr. X, who earns £146,000 a year, contributes £46,000 to his pension through salary sacrifice. This strategy helps him stay below the £100,000 income threshold, the point at which the personal allowance begins to taper. By doing so, he avoids falling into the effective 60% marginal tax bracket. At the same time, he significantly increases his pension savings in a highly tax-efficient way.
Pensions vs. ISAs: Should You Prioritise Flexibility or Tax Savings?
ISAs (Individual Savings Accounts) remain a fantastic tool for savers and investors across the UK. They offer tax-free growth, flexibility, and simplicity — making them an essential part of many people's wealth-building strategies.
However, when it comes to deciding whether an ISA is better than a pension, there’s no one-size-fits-all answer. The right choice depends entirely on your individual goals and circumstances.
- If flexibility and access are your top priorities — for example, if you may need the funds before retirement — then an ISA could be a better fit.
- If your focus is on long-term growth, tax efficiency, and retirement planning, especially if you’re a higher-rate taxpayer, then pensions offer more value through tax relief and employer contributions.
For younger savers who value accessibility, ISAs offer more control. But for those prioritising tax efficiency and long-term growth, pensions remain a powerful wealth-building tool, even with the upcoming IHT changes.
“One of my clients is earning £146,000 per annum. He’s taken a £46,000 salary sacrifice because he cannot handle going over the £100K threshold in the UK and paying close to 60% tax..”
With pension pots becoming part of your estate for inheritance tax (IHT) from April 2027, it's important to start thinking about how to protect your long-term savings and preserve your wealth for the next generation.
In reality, it’s not about choosing one over the other. It’s about finding the right balance based on your income, age, financial goals, and lifestyle needs. A smart approach often includes both pensions and ISAs, used together to give you the best of both worlds: long-term growth and short-term accessibility.
Have Questions About These Changes?
The 2027 pension tax changes may seem like a big shift, but that doesn’t mean pensions are no longer a valuable retirement tool. They still offer significant tax benefits, particularly with employer contributions and salary sacrifice. However, if flexibility is your priority, ISAs might now play a bigger role in your financial strategy.
These changes may seem daunting, but with the right strategy, you can still make the most of your pension savings. If you're unsure about the best approach, speaking with a financial adviser can help you make informed decisions with confidence.
📅 Book your free consultation today and start planning for a smarter retirement.