What the 2026 Budget means for pensioners

Chancellor John Healey’s first Budget was characterised by tweaks around the edges of policy, rather than big bang announcements. This was true for pensions too. But even the relatively small changes could have a big impact on your retirement income.

Giving Britain financial ‘breathing space’ was the theme of Labour’s 2026 Autumn Budget. Yet for pensioners relying on savings and rental income, there were some surprise tax hikes that will likely be unwelcome after similar raises last year.

Matthew Phillips, director of wealth planning at wealth manager Canaccord Wealth, said there was “relatively little in the Budget that should require people to fundamentally reconsider their financial plans”, from a wealth planning perspective.

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“After several years of change, that relative stability is no bad thing,” he said.

“However, a fairly quiet Budget does not mean there is nothing for savers and investors to consider.”

Here’s all the key Budget changes for pensioners, the likely impact and what to do next.

Pension tax allowance

A new pension tax allowance is being introduced for low-earning pensioners, equal to the 2027/28 full new state pension rate of £13,037 per year.

This ensures pensioners won’t be dragged into paying income tax purely because the state pension will rise by 3.9% next April, in line with the triple lock guarantee, (which they otherwise would because that exceeds the frozen personal allowance of £12,570).

The pension tax allowance will gradually reduce as pensioners’ income increases. For every £3 of income above £13,037 (the full level of the new state pension), the pension tax allowance will reduce by £1.

So those whose total income is above £13,319 lose the pension tax allowance altogether.

Becky O’Connor, head of pensions at PensionBee, said: “Sparing pensioners the hassle of being chased by HMRC for small tax bills is welcome.

“But the pension tax allowance is worth around £93 in its first year and is withdrawn as soon as someone has a modest private pension or a bit of savings interest, so people who saved a little extra could really end up feeling penalised for it.”

Savings tax increase

Savings tax rates were due to increase, but the government is going further by adding an additional two percentage points of tax from April 2027, above what was planned. For pensioners, who often keep substantial cash balances on hand for day-to-day expenses, this will likely be unwelcome news.

The savings tax hike means that for basic rate taxpayers in receipt of more than £1,000 of savings interest, every extra pound of interest will be taxed at 24% rather than 20%.

Similarly, for higher rate taxpayers whose personal savings allowance is £500, any additional savings interest will be taxed at 44% rather than 40%.

For additional rate taxpayers the change is particularly painful, as every pound of savings interest is taxable but at 49% rather than 45%.

Neil Jones, tax and wealth planning specialist at Standard Life, said: “For those with significant cash balances or regular savings, the incentives have edged further towards ensuring money is directed towards an ISA.

“However, against a backdrop of inflation, it’s important those affected look carefully at whether their money is keeping pace with inflation and consider whether it would be better invested where there is the potential for higher returns, albeit without guarantees.”

Ways to avoid being hit by the savings tax trap include:

• Make the most of your £20,000 ISA allowance
• Transfer savings to your spouse
• Consider Premium Bonds
• Invest in low-coupon short-dated gilts

State pension triple lock

The Budget confirmed the adjustment to the triple lock from 2030. Rather than applying the highest of CPI inflation, 2.5% or average weekly earnings each year, the government will review increases over time to ensure the state pension keeps pace overall.

Claire Trott, head of advice at St. James’s Place, said: “This should smooth increases and potentially deliver significant savings for the Treasury. It also addresses the cumulative ‘ratchet effect’ seen during Covid, when a year of sharp earnings growth compounded with increases in subsequent years.”

Rental income tax increase

Many pensioners partly rely on income from buy-to-let property to help pay for their retirement. But like savings, it was announced in the Budget the rate of tax on income from property is being increased from April 2027 by two percentage points across each marginal tax band; to 24% for basic rate payers, 44% for higher rate taxpayers and 49% for additional rate payers.

Alex Pugh, financial planner and partner at wealth management firm Saltus, said the increase “lands on a group that already feels overtaxed, with 43% of high net worth individuals telling us they pay too much tax, and 56% concerned about higher taxes on investment property”.

“For many of our clients, savings and rental income are a key part of their retirement plans, so this isn’t a small change. Using ISA and pension allowances in full is now more important than ever, and anyone with significant savings interest or rental income should review how those assets are held before April 2027.”

Definition of terminal illness for pension access

Changes are being made to provide greater flexibility in the medical evidence requirements for serious ill-health pension lump sums, with the government deciding to change the definition of terminal illness to make pension savings easier to access.

Under the new rules a lump sum may be paid where the pension scheme member can be reasonably expected to die within 12 months and the supporting medical evidence may be provided additionally by a member’s medical practitioner based outside the UK.

Jon Greer, head of retirement policy at Quilter, said: “Prognoses are inherently uncertain. The revised definition needs to recognise that uncertainty and give patients, medical practitioners and pension providers a clear, workable test.

“The announcement does not yet specify the new wording or confirm whether it will align with the test used for DWP benefits, so the detail will be important.”

Pension death benefits

Pensioners, such as surviving spouses, will also benefit from the government decision to remove the requirement that pension scheme administrators must pay tax-free death benefits to beneficiaries within two years of learning of the death of a member aged under 75 (the ‘two-year rule’).

Under the change, a pension lump sum death benefit paid to a beneficiary more than two years after the pension scheme became aware of the member’s death will no longer be subject to an income tax charge.

The two-year limit is also being removed where beneficiary annuities are paid from the deceased member’s drawdown funds and where funds are designated for a UK resident under a pension scheme outside the UK.

O’Connor from PensionBee said: “Removing the two-year rule is a welcome fix: families shouldn’t face a tax bill simply because a pension payout was delayed by probate or paperwork outside their control.

“Greater certainty on how tax is collected when the lump sum death benefit allowance is exceeded should also make a difficult process less daunting for beneficiaries. In the run-up to pensions being included in estates for inheritance tax purposes, these changes are even more important.”