Posted on 31/07/2025 by Benn Little
The Spring Budget 2025 may not have introduced sweeping reforms to pensions, but it has reignited a critical question for savers and retirees alike: Are pensions still worth it? The short answer is yes, but the landscape is evolving, and understanding the nuances is key to making informed financial decisions.
No major pension reforms
Chancellor Rachel Reeves’ Spring Statement confirmed that no new pension tax changes were introduced. The Annual Allowance remains at £60,000, and the Lifetime Allowance (abolished in 2024) has not been reinstated. This means high earners can continue to contribute more without facing punitive tax charges.
State Pension Triple lock maintained
The State Pension will rise by 4.1% in April 2025, in line with average earnings growth. This brings the full new State Pension to approximately £230.25 per week, offering some inflation protection for retirees.
Inheritance Tax (IHT) for pensions
As announced at the Autumn Budget 2024, from the 6th April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax purposes and personal representatives will be responsible for reporting and paying any Inheritance Tax due on pensions to the HMRC.
Despite the lack of headline changes in the Spring Budget 2025, pensions remain one of the most powerful tools for building long-term, tax-efficient wealth. Here’s why:
1. Generous tax relief
Pension contributions benefit from tax relief at your marginal rate, meaning:
This upfront boost is unmatched by other savings vehicles. For high earners, it’s a way to reclaim tax already paid and redirect it into long-term growth.
In addition, businesses can make employer contributions for employees, and they are treated as a deductible expense when calculating taxable profits. But the contribution must be made wholly and exclusively for the purposes of the trade.
2. Tax-free investment growth
All investments within a pension grow free from income tax and capital gains tax. Over decades, this can significantly enhance returns compared to taxable accounts.
For example:
A £100,000 pension pot growing at 5% annually for 20 years becomes £265,000 entirely tax-free until withdrawal.
In contrast, a similar investment in a taxable account could be eroded by dividend tax, CGT, and income tax.
This makes pensions ideal for long-term compounding and wealth preservation.
3. 25% Tax-free lump sum
When you access your pension (currently from age 55, rising to 57 in 2028), you can typically withdraw 25% of your pot tax-free.
For example:
A £400,000 pension pot allows a £100,000 tax-free lump sum.
The remaining £300,000 can be drawn flexibly, taxed as income at your marginal rate of tax.
It’s a unique feature that adds flexibility and liquidity to retirement planning.
4. No Lifetime Allowance (LTA)
The abolition of the LTA in 2024 removed the cap on how much you can accumulate in pensions without facing punitive tax charges. Previously, exceeding the LTA (£1.073 million) triggered tax rates of up to 55%. Now there’s no upper limit on pension savings.
Even without further contributions, tax relief and growth make this a compelling long-term investment.
Pensions remain a cornerstone of retirement planning in 2025. While the Spring Budget didn’t bring major changes, the threat of future reform, especially around IHT and tax relief, means it’s more important than ever to act strategically.
A financial adviser can help you navigate the evolving pension landscape, ensuring contributions are optimised within current allowances and aligned with your long-term goals.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
We will review the best and most tax-efficient methods for your retirement plans and can discuss with you the range of benefits available when you come to retire. Using our extensive knowledge of retirement planning - both pre- and post- retirement, to help you meet your future aspirations.