Budget 2026 and HMRC Pension Schemes Newsletter
Last week’s Budget speech included a number of pensions-related announcements and HMRC has published its latest Pension Schemes Newsletter (no. 186) discussing the changes. Key points to note include:
- Two-year death benefit deadline: For payments made on or after October 28, 2026, beneficiaries will no longer be taxed just because death benefits are paid more than two years after the member’s death (or knowledge of the death). Details are set out in this policy paper on tax treatment of pension and lump sum death benefits under the two-year rule. Schemes should review their rules for references to the two-year deadline and consider updates to processes and communications.
- Serious ill-health lump sums: The government will make changes to the definition of terminal illness to allow a serious ill-health lump sum to be paid where a pension scheme member can be reasonably expected to live for less than a year, and to allow medical practitioners based outside the UK to provide medical evidence. These changes will be part of the Finance Bill 2026–27; see this policy paper on the definition of terminal illness for pensions access for details.
- DC reform and relaxation of rules around retaining tax protections on transfer: The rules on retaining a protected pension age and lump sum protections following a transfer will be relaxed to support DC consolidation and guided retirement. Other changes will be made to facilitate the introduction of retirement CDC schemes. HMRC’s newsletter sets out details.
- Pensions Commission: The final report on pensions adequacy will be published in February next year.
- Pensioner taxation: A new Pension Tax Allowance will apply from April 6, 2027 to April 5, 2030. Individuals over State Pension age whose total income (regardless of source) is at or below the full new State Pension will pay no tax, and the allowance will taper away above that level. Details on this are set out in this policy paper on reduction in Income Tax for eligible pensioners and Pension Tax Allowance Explainer fact sheet. There will also be changes to how tax is assessed and collected where the lump sum and death benefit allowance has been exceeded. Details are set out in this policy paper on Income Tax: collecting tax on excess lump sum death benefits.
- Inheritance tax: The government will introduce legislation to allow a prospective personal representative (PR) to direct pension scheme administrators to pay inheritance tax when certain conditions are met (previously this was only going to be available to PRs). Legislation will also introduce flexibility on how notional pension property is counted when part of the estate is left to charity. HMRC newsletters over the coming months will highlight issues and signpost guidance and support.
HMRC’s Pension Schemes Newsletter also covers a range of other topics including: delays to the digitalisation of relief at source (DigiRAS) strategic payments service; an updated online guidance tool to help individuals claiming a pension tax refund (HMRC suggests schemes make members aware of this when discussing pension tax refund claims); and correct routes for contacting HMRC.
Read the Budget document, overview policy paper and HMRC’s Pension Schemes Newsletter.
TPR guidance on embracing AI opportunities responsibly
The Pensions Regulator (TPR) has published guidance encouraging trustees to explore how artificial intelligence (AI) could deliver better member outcomes while understanding and managing risks. The guidance emphasises that the use of AI falls within trustees’ existing duties and sets out:
- how trustees should address their knowledge, understanding, systems and governance requirements in respect of AI
- questions that trustees should be asking and be able to answer on their scheme’s AI use
- how schemes should be managing providers’ AI use
- how to manage the influence of AI on trustee decision-making, including understanding the AI output, justifying how that output was used, safeguards and good practice on documentation
- how risk assessment, business continuity and cyber controls should be considered
- an emphasis on the importance of data quality and other data issues, such as where data is stored when being used by an AI tool and data protection requirements
- how AI should be used to support and protect members, including considering the risk of bias, transparency with members and members’ personal use of AI.
Read the use of artificial intelligence (AI) in pension schemes guidance.
Employment Tribunal finds no direct discrimination on grounds of age
A recent Employment Tribunal case provides a review of issues around direct (and, to a lesser extent, indirect) age discrimination, in the context of an individual who was made redundant just before his 55th birthday and was therefore not entitled to an enhanced early retirement pension: Henley v. Thurrock Council.
Thurrock Council proposed redundancies to reduce a large structural deficit. Members of the Local Government Pension Scheme who are made redundant from age 55 onwards are entitled to receive their full accrued pension immediately, which the LGPS calculated as an additional cost of almost GBP358,000 in Mr Henley’s case. As head of his team, Mr Henley was involved in discussions about the redundancy programme and timing; as originally proposed, his notice period would expire after his 55th birthday.
However, some redundancy exercises within the council were postponed and as the number of employees at risk of redundancy was below 100, the consultation period was reduced to 30 days rather than 45. Mr Henley asked for his consultation period and/or notice period to be extended to ensure that he had reached age 55 prior to termination, but this was refused. He did not seek redeployment and his appeal against redundancy was dismissed.
Employment Judge Gardiner noted that he needed to consider whether there were facts to show that age may have been the reason for the alleged discriminatory treatment. If so, then it would be for the council to prove a non-discriminatory explanation on the balance of probabilities. A finding of direct age discrimination could be defended by showing that the discriminatory treatment was a proportionate means of achieving a legitimate aim.
In this case, the judge found that the reduction in length of the consultation period, and the decision as to when to start that period, were not acts of age discrimination. Nor were the council’s decisions to refuse to extend the consultation period or notice period, or to give notice of dismissal on a particular date.
If (contrary to those findings) there had been any direct age discrimination, it would have been objectively justifiable by the council, which had a legitimate aim of saving substantial costs through restructuring. Mr Henley had no entitlement to an enhanced pension from age 55, and there was no “procedural corner cutting” to expedite the process in his case (unlike the earlier case of Woodcock).
Indirect age discrimination was raised as an issue but not pursued. The judge found that there was no practice by the council to make decisions or take actions to avoid employees being made redundant on or after age 55.
Read the Tribunal’s decision.
Employment Rights Act: updated timeline and new guidance
The government has published an update to the timetable for implementing changes under the Employment Rights Act 2025. Protections in cases of “fire and rehire”, including where this is linked with a variation of any term or condition relating to pensions, will now take effect in March 2027. The government has also published a consultation on a revised statutory Code of Practice on Dismissal and Re-engagement to reflect these changes, which closes on December 17, 2026. New provisions for bereavement leave are still scheduled for April 2027.
Read the updated timeline and Code consultation.
