UK Pensions Legal Landscape: What’s new in January 2025?

This update covers:

• Investment news:
  • Pensions Investment Review: consultation closes
  • Derivatives clearing exemption to be extended long-term
  • Considering non-financial factors: a Counsel’s opinion
• In relation to tax:
  • Consultation closes on inheritance tax (IHT) consultation
  • HMRC Newsletter 166: good news for new pensioners
• No change to auto-enrolment thresholds.

For our update on the Chancellor’s recent announcement on defined benefit (DB) surplus, please click here.

Pensions Investment Review: consultation closes

• The government consultation “Pensions Investment Review: Unlocking the UK pensions market for growth” closed on 16 January 2025.  
• The Chancellor confirmed in a speech on 29 January that the final report of the first phase of the Review will be published this Spring.  Elements of the proposed reforms which require primary legislation will be included in the Pension Schemes Bill, expected this Spring or Summer.
• The consultation set out “proposed reforms to deliver scale, accelerated consolidation and drive a focus on value over cost in the DC [defined contribution] workplace pensions market”. The proposals include:
  • Setting minimum size requirements for workplace DC schemes used for auto-enrolment, plus limits on the number of default arrangements; and
  • Overriding provisions in individual pension contracts to allow bulk transfers without consent from contract-based pension arrangements, subject to various safeguards.
• However, there has been criticism that the government’s focus on consolidation and increasing the size of DC schemes may hinder competition and innovation and may also not deliver the desired increased investment in UK productive finance. 

Investment: clearing exemption for pensions to be extended long-term

The government has announced that the existing exemption for pension funds from the obligation to clear certain derivative contracts through a central counterparty (CCP) will be maintained long-term.

More detail

The requirement to clear some derivative contracts through a CCP is imposed by the European Market Infrastructure Regulation (EMIR).   Post-Brexit, this requirement still applies in the UK, as part of EU assimilated law.  

Complying with the clearance obligation could require pension schemes to hold considerably more cash to meet the CPP margin requirements, so reducing the funds available for paying member benefits or investing in growth assets.

Because of the difficulties which the clearance obligation would cause pension schemes, a series of temporary exemptions have repeatedly postponed the date for pension schemes to comply. The current exemption is due to expire on 18 June 2025.

The government’s plan to maintain the exemption long-term is pragmatic and very welcome. 

Investment: considering non-financial factors – Counsel’s opinion 

A Counsel’s Opinion on the investment of assets in the Local Government Pension Scheme (LGPS) includes some interesting points of wider application for private sector occupational pensions, in particular that investing to promote UK economic growth is likely to be a “non-financial” factor.  

More detail

Nigel Giffin KC has updated his earlier Opinion on investments and non-financial considerations in the context of the LGPS.

Deciding whether a factor is financial or non-financial is important because, according to existing law applicable to occupational pension schemes as well as the LGPS:

• Financial factors may always be taken into consideration when making investment decisions; but
• Non-financial factors may only be taken into account where:
  • doing so does not carry a significant risk of financial detriment (the “financial criterion”); and 
  • the decision-makers have good reason to think that scheme members would support their decision (the “member support criterion”). 

In a blow to the government’s ambitions for promoting UK growth through pension scheme investment, the Opinion doubts that “truly local” investment, or investment in the wider UK economy, will generally be a financial factor.   On this view, under the law as it currently stands, promotion of the UK economy could only be taken into account in investment decisions if both the financial criterion and the member support criterion are met.

As the Opinion points out, however, the current legal position on pension investment decision-making could be altered by the forthcoming Pension Schemes Bill.  With a large majority in the House of Commons, the government can expect the Bill to be passed in substantially the form it chooses.

Consultation closes on inheritance tax (IHT) consultation

The government’s technical consultation “Inheritance Tax on Pensions: Liability, Reporting and Payment” closed on 22 January 2025.   

Under the proposals, most death benefits (apart from scheme pensions) paid from registered pension schemes will be part of the deceased member’s estate for IHT purposes, unless the benefits are paid to a surviving spouse, civil partner or a charity.  The new rules will apply on deaths from 6 April 2027.

The consultation focussed on the process of assessing whether any IHT is due on the pension scheme death benefits and on the payment of IHT by the scheme administrator.  

However, in workshops run by HMRC during the consultation period there was considerable industry pushback on the scope of the proposals.  In particular, including discretionary death in service lump sums within a member’s IHT estate would cause significant additional complexity for scheme administrators and personal representatives (PRs), as well as likely financial hardship for bereaved families.

We must hope that HM Treasury / HMRC take on board the many detailed responses to consultation and revise their proposals to be more workable in practice.  HMRC Newsletter 166 promises us a both a formal response and draft legislation “later in the year”.

HMRC Newsletter 166: good news for new pensioners

Newsletter 166 explains that HMRC is improving its tax code system for those who are new to receiving a private pension, so that they pay the correct amount of tax more quickly.

Since the introduction of “pension freedoms” in 2015, HMRC has applied emergency tax codes to members who make withdrawals from their defined contribution (DC) pensions, resulting in frequent overpayments of tax on those pensions. 

It’s been estimated that HMRC repaid almost £50m tax to such members in Q4 2024 (compared to £38m in Q4 2023), with total repayments since 2015 being almost £1.4bn (PensionsAge article)

However, these figures may not represent the true amount of overpaid tax, as repayments have only been made where the member submitted the relevant HMRC reclaim form.   

HMRC explains that schemes do not need to make any changes to their tax coding process, as HMRC is automatically updating the tax codes for members on a temporary tax code and who would benefit from being on a cumulative code.

No change to auto-enrolment (AE) thresholds

Pensions Minister Torsten Bell has confirmed that all AE thresholds will be maintained at their 2024/25 levels in 2025/26.

• The lower earnings limit of the qualifying earnings band will remain at £6,240.
• The upper earnings limit of the qualifying earnings band will remain at £50,270.
• The AE earnings trigger (the minimum level of earnings at which a worker must be auto-enrolled into a qualifying scheme) will remain at £10,000.

In his statement, Bell said, “The main focus of this year’s annual statutory review of the AE earnings trigger and lower and upper earnings limits of the qualifying earnings band (the AE thresholds) has been to ensure the continued stability of AE for employers and individuals. It is important that AE works for individuals, supporting those for whom it makes economic sense to save towards their pensions whilst also ensuring affordability for employers and taxpayers”.

Authored by the Pensions team.