Spring Statement: what could Rachel Reeves say about pensions?

Chancellor Rachel Reeves will deliver her Spring Statement on 26 March and there are plenty of rumours about what could be announced.

These include reducing the cash ISA allowance, cutting government spending and increasing taxes. However, it is now understood there won’t be any change to the cash ISA limit next week, although a shake-up to the ISA rules could still be announced at a later date.

The Spring Statement will follow a Spring Forecast from the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog.

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While the government says it is “committed to one major fiscal event a year” – presumably the Autumn Budget rather than the Spring Statement – speculation is mounting that we could still see some tax and spending changes in next week’s statement.

“Is it a Spring Forecast? A Spring Statement? Dare we even say it – a mini-Budget?” comments Tom Selby, director of public policy at AJ Bell.

“Whatever label the chancellor puts on her set piece announcement on 26 March, the economic picture the OBR paints is expected to be grim, with fears of stagnation looming and the spectre of rising defence costs as Donald Trump’s US government retreats from Europe further threatening to strain the public purse.”

He adds: “Against such a challenging backdrop, there is a growing expectation that tough fiscal measures are in the offing, despite the chancellor’s insistence there would be no return to austerity.”

If Reeves is wondering how to balance the books, it’s possible we could see some changes to pensions. The government has already targeted pensioners and pension savers since getting into power last year, such as by means-testing the Winter Fuel Payment, and hitting pension pots with inheritance tax.

We look at potential pension announcements in the upcoming Spring Statement.

State pension

We already know the state pension will rise by 4.1% next month. But, the huge bill of paying the state pension, along with the commitment to the triple lock, could be a target for a government keen to slash costs.

Steven Cameron, pensions director at Aegon, warns: “If the OBR’s report and other budgetary pressures are worse than anticipated, we can’t rule out a ‘rabbit in the hat’ review of the state pension. There’s already an ongoing review of the state pension age and government finances may mean it needs to increase further or faster.”

He adds that the state pension triple lock could also come under scrutiny, as it’s proven costly and unpredictable in recent years. “While the government has currently committed to keeping it, the formula might be adapted. Instead of annual increases being the highest of earnings growth, inflation, or 2.5%, a smoothing mechanism could be introduced.”

According to Cameron, pensioners might receive an inflation increase as a minimum, and if, over the previous three years, wage growth has on average been higher than inflation, they could receive an additional uplift. “This would protect pensioner purchasing power and make future costs less unpredictable,” he adds.

Pensions and inheritance tax

Reeves announced in last year’s Autumn Budget that pension pots would become subject to inheritance tax (IHT) from April 2027.

This was something of a surprise, and many pension experts responded by saying the policy would penalise prudent savers and their loved ones, while adding complexity.

A government consultation into how the rule change would work has now ended, and it’s possible Reeves might use the Spring Statement to give an update.

Steve Webb, partner at pension consultants LCP, and a former pensions minister, tells MoneyWeek: “At a stretch, we might get an update on plans to apply IHT to pensions, perhaps saying that HMRC are going to do a further consultation because although the policy hasn’t changed they want to make it less onerous on individuals (and pension schemes).”

Selby adds: “Given there were reportedly hundreds of responses to the consultation, the Spring Statement may come too soon for the chancellor to give detailed feedback. She could, however, use the opportunity to give an indication of whether she is willing to consider doing things differently, or if the Treasury is committed to its IHT plans.”

Tax allowances

There is speculation that Reeves might extend the Tories' freeze on tax thresholds beyond 2028. This would drag more people into paying tax, and higher rates of tax.

“The freeze on allowances is due to end in 2028 but in light of the fiscal straitjacket Reeves finds herself in, extending this to 2030 could raise some much-needed cash for the Exchequer,” comments Selby.

Frozen tax allowances mean that as people’s wages rise, they are dragged into higher tax brackets. The combination of a static tax-free personal allowance and rising state pension thanks to the triple lock also means that many pensioners will soon have to start paying tax on their state pension.

Selby notes: “The Treasury may be comfortable giving with one hand through state pension increases while taking with the other via income tax, but it also leaves the door open for the Conservatives to accuse the government of hitting pensioners with a ‘retirement tax’.”

Workplace pensions

According to Webb, it’s possible there could be an update on government plans to create defined contribution pension “mega funds”, as trailed in the Autumn 2024 Mansion House speech, by forcing consolidation of smaller schemes.

We may also hear about reforms aimed at encouraging pension schemes to invest more in the UK economy.

Selby comments: “The second stage of the Pensions Review, focused on adequacy, has yet to materialise and Reeves could provide an update on the government’s thinking in the Spring Statement.

“There are significant challenges to overcome here, principally how and when to scale up minimum automatic enrolment contributions from 8% of ‘qualifying earnings’. Having already significantly hiked costs on employers in her October Budget and with the government focused on delivering improved economic growth numbers, there is every chance this particular reform will find its way into the political long grass.”

Pensions tax relief

With an uncertain economic backdrop, and a government that likes to surprise us (see: IHT on pensions; Winter Fuel Allowance; refusing to pay Waspi compensation, to name just three), could the Spring Statement spring a pension shock on all of us?

Tomm Adams, partner at tax firm Blick Rothenberg, tells MoneyWeek: “We’ve already had one nasty pensions surprise in the first year of the Labour government, with the announcement that pensions will be brought into the scope of inheritance tax. Very few predicted this; instead, we were all speculating over some kind of cuts to income tax relief either on pension contributions or on benefits taken in retirement. For example, reducing the tax-free lump sum from 25% of the pot to say 20% or even 5%.”

He adds: “I don’t imagine the chancellor will backtrack on this inheritance tax raid in her Spring Statement, but could she cut income tax relief after all? To do so would be disastrous for millions of ordinary people looking to do the right thing by saving long term. Short-term Treasury gains would come at the cost of a serious, long-lasting impact on savers’ confidence in the UK pensions system and a real impact on the lives of future pensioners.”