The UK’s pension system is poised for a transformative year in 2025, with seven major reforms expected to reshape how savers plan for retirement. From the much-anticipated introduction of pension dashboards to contentious changes in inheritance tax (IHT) on pensions, these developments will have far-reaching implications for millions of retirees and future savers.
According to Craig Rickman, a pensions expert from interactive investor:
“The year 2025 is shaping up to be pivotal for the retirement landscape, as the new government seeks to make headway towards its goal of improving later-life outcomes for savers.”
This article explores the key reforms, their potential impact, and the questions they raise about the future of pension savings in the UK.
The Launch of Pension Dashboards
One of the most highly anticipated changes is the rollout of pension dashboards, a digital platform designed to consolidate all pension savings into one secure location. The initiative, developed by the Money and Pensions Service, aims to simplify retirement planning and empower savers to make informed decisions.
Key Details:
- The largest pension schemes must connect to the dashboard by April 2025, with smaller schemes following by September 2026.
- Full functionality is expected by 2027.
Rickman emphasised the importance of engaging with this new tool, stating:
“While pension dashboards are far from the silver bullet to help everyone knock their long-term savings into shape, they should represent a giant leap forward. Once they do go live, to get the most out of the dashboard, it is essential for savers to engage with them.”
For savers with multiple pension pots, particularly those with legacy schemes from past employers, the dashboard could prevent lost savings and improve financial clarity.
Controversial Changes to Inheritance Tax on Pension Pots
Starting in April 2027, unspent pension funds will be brought into the scope of inheritance tax (IHT). Under the proposed rules, pensions left behind after death will face a 40% tax, raising concerns about double taxation for beneficiaries.
Rickman warned about the risks posed by frequent tax changes, saying:
“Reforms to pension tax have become so frequent, drastic and sometimes abrupt, that we have little idea what the rules will look down the line, making it hard to save for our golden years in confidence. One would hope the pension tax system gets left alone for the rest of the current parliament to bring some much-needed consistency.”
The IHT reform has sparked widespread criticism due to its potential to:
- Lead to double taxation, where beneficiaries also pay income tax on inherited pension funds.
- Create confusion about which types of pensions are subject to the tax.
Rickman called for clarity, urging the government to define the scope of the rules well in advance:
“Applying a single tax on death to avert an IHT reporting headache for estate executors and pension schemes and give savers a better idea about the potential tax implications of leftover pension savings on death makes far more sense in my view.”
Auto-Enrolment Contribution Levels to Remain Static
Despite discussions around increasing auto-enrolment contributions, the government has opted to maintain the current minimum levels:
- Employee contribution: 5%.
- Employer contribution: 3%.
While this decision offers stability, it has raised concerns about the adequacy of these contributions in ensuring a comfortable retirement. Rickman highlighted the need for individuals to take proactive steps:
“Rather than rely on the government, we must all take control of our own future. A good place to start is to find out the maximum your employer is willing to contribute to your pension, as not all companies stick to the minimums—some are more generous.”
The WASPI Debate Continues
The ongoing campaign for compensation by WASPI (Women Against State Pension Inequality) women is expected to dominate headlines into 2025. Despite the Ombudsman recommending compensation ranging from £1,000 to £2,950, the government has refused to allocate funds.
Meanwhile, the State Pension will increase by 4.1% in April 2025, with the full pension rising to £230.25 per week (£11,973 annually). This adjustment provides some relief to retirees but does little to address the unresolved grievances of WASPI women.
Addressing the Advice Gap
Currently, only 10% of UK savers receive professional financial advice, a statistic that underscores the need for targeted support. In December 2024, the Financial Conduct Authority (FCA) began consulting on new measures to bridge this gap.
These include:
- Allowing firms to provide targeted support for savers managing withdrawals.
- Identifying unsustainable drawdown practices and offering tailored guidance.
Rickman commented:
“We can expect to hear more about ‘targeted support’ and how it will help savers and investors during 2025.”
Defined Contribution “Megafunds”
In a move to overhaul Defined Contribution (DC) schemes, the government plans to consolidate smaller pension funds into large-scale “megafunds”. These pooled resources will be directed toward UK infrastructure and private equity investments, with the goal of boosting both retirement savings and economic growth.
While the idea has drawn criticism from those wary of government influence over investments, Rickman noted that compulsion is not yet on the table:
“To be clear, the government hasn’t said that allocating a certain amount of scheme money to the UK will be compulsory. Not yet anyway.”
Pensions at a Crossroads
The cumulative impact of these reforms underscores the challenges facing savers as they navigate an increasingly complex pension landscape. Rickman summed up the situation:
“Reforms to pension tax have become so frequent that we have little idea what the rules will look like down the line, making it hard to save for our golden years in confidence.”
With 2025 shaping up to be a year of change, staying informed and taking proactive steps will be essential for anyone planning their retirement. From engaging with new tools like pension dashboards to understanding the implications of inheritance tax reforms, savers must adapt to ensure they secure the best outcomes for their future.
