Market fluctuations can feel unsettling, especially when they involve your pension. A 20% drop in global equities in 2022 saw the average UK defined benefit (DB) pension scheme’s funding level swing by roughly 15 percentage points in a matter of months, according to data from the Pension Protection Fund. For someone with a £200,000 pension pot, that kind of movement could mean a £30,000 swing in their scheme’s ability to meet its promises. But the real story isn’t the volatility itself — it’s what happens next, and how the rules around your pension are changing in response.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
What’s happening now is a fundamental shift in how UK pensions are structured, funded, and taxed. Many DB schemes that were in deficit a few years ago now hold surpluses, and the government is rewriting the rules on what can be done with that money. At the same time, new tax charges are coming for unused pension pots and death benefits, and the way your defined contribution (DC) pension pays you an income is about to change. Here’s what you actually need to know.
What the latest pension changes mean for your money
The central concept here is the pension surplus — when a DB scheme holds more assets than it needs to pay its promised benefits. After years of deficits, many schemes now find themselves in this position thanks to rising interest rates and improved funding levels. The
What I tend to notice is that most people don’t realise their pension scheme’s financial health has flipped — and that the rules around what happens next are being rewritten right now.
Rates, thresholds, and what they actually cost you
The numbers that matter most right now aren’t market returns — they’re the tax and regulatory thresholds that determine how much of your pension you keep and how it’s treated when you pass it on. The table below shows the key changes and their effective dates.
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| Change | Effective date | What it means in practice |
|---|---|---|
| DB surplus tax refund rate reduced | 6 April 2024 | Tax on surplus refunds to employers cut from 35% to 25%. A £1m refund now costs £250k in tax instead of £350k. |
| Unused pensions and death benefits in IHT | 6 April 2027 | A £500,000 unused pension pot could face IHT at 40%, adding up to £200,000 to your estate’s tax bill. |
| NIC cap on salary sacrifice pension contributions | 6 April 2029 | Employer contributions above an unspecified cap will attract employer and employee NICs. A higher earner sacrificing £20k could lose ~£3,800 in NIC savings. |
| DC guided retirement for master trusts | Spring 2027 | Your DC provider must offer a default retirement income solution. You’ll no longer be left to figure out drawdown or annuity choices alone. |
Consider a realistic scenario: you’re a higher-rate taxpayer with a £400,000 DC pension pot and a £200,000 DB transfer value. Under current rules, if you die before 75, your beneficiaries can usually take the pot tax-free. From April 2027, that £600,000 total could be added to your estate. If your estate exceeds the £325,000 nil-rate band, the excess is taxed at 40%. That’s a potential £110,000 tax bill that didn’t exist before. The change doesn’t just affect the wealthy — anyone with a decent pension and a home could find their estate pushed over the threshold.
Errors and gaps that cost pension holders
Assuming your DB scheme is still in deficit
Many people still think their final-salary pension is underfunded and that there’s nothing to worry about. The reality is that a significant proportion of DB schemes now hold a solvency surplus, according to WTW. If your scheme has a surplus, your employer may be able to take a refund — and from 2027, they may also be able to pay lump sums to members. The mistake is ignoring the possibility that your scheme’s financial position has changed. If you’re in a DB scheme, ask your trustees for the latest funding update. If a surplus exists, the conversation about how it might be used — including potential member payments — becomes relevant.
Ignoring the IHT change until it’s too late
The most costly error is assuming your pension will pass tax-free to your beneficiaries regardless of when you die. From April 2027, that’s no longer true. The fix isn’t complicated, but it requires action. You can nominate beneficiaries on your pension provider’s form, review your estate planning with a solicitor, and consider whether drawing down your pension earlier or making gifts from your estate makes sense. The key deadline is 6 April 2027 — after that, the new rules apply to any death benefit paid out. If you’re over 55 and in good health, drawing down your pension and gifting the proceeds could reduce the IHT hit, but you’d need to survive seven years for the gift to fall outside your estate.
Overlooking the salary sacrifice cap
If you’re a higher earner using salary sacrifice to boost your pension while saving on National Insurance, the 2029 cap will change the maths. Currently, you and your employer save 2% and 13.8% NIC respectively on every pound sacrificed. After the cap, contributions above the limit will attract NICs again. The mistake is assuming this strategy will remain as tax-efficient indefinitely. If you’re sacrificing more than, say, £10,000–£15,000 a year, start modelling what happens after April 2029. You might need to shift some contributions into a different structure or accept the higher tax cost.
Not preparing for DC guided retirement
Most people with a DC pension have no idea how they’ll turn their pot into an income. The government’s guided retirement rules, due from Spring 2027 for master trusts, mean your provider must offer a default retirement income solution. The mistake is waiting until then to think about it. If you’re within five years of retirement, you should already be reviewing your investment strategy and understanding the options — drawdown, annuity, or a combination. The new rules won’t make the choice for you; they’ll just ensure a default exists. If you don’t engage, you’ll end up in whatever default your provider picks, which may not suit your circumstances.
How to navigate the changing pension landscape
Understanding your DB scheme’s surplus position
If you’re in a DB scheme, the first step is finding out whether your scheme has a surplus. Your annual benefit statement should include a funding level, but you can also request a more detailed update from the trustees. If the scheme is in surplus, ask what the trustees and employer are planning. Under current rules, some schemes can already make surplus refunds to employers or use surplus to fund DC contributions. From Spring 2027, new legislation will allow one-off payments to members and more flexible surplus sharing. The Pension Schemes Bill, expected to receive Royal Assent in Spring 2026, lays the groundwork for these changes. If your scheme has a surplus, you want to be part of the conversation about how it’s used — not find out after the fact.
Planning for the IHT change on pensions
The Finance (No. 2) Bill will bring unused pensions and death benefits within the inheritance tax regime from 6 April 2027. This means your pension pot is no longer a tax-free inheritance vehicle. To plan for this, start by reviewing your current nominations and beneficiaries. Then consider your overall estate value — including your home, savings, and pension — against the £325,000 nil-rate band. If you’re likely to exceed it, options include drawing down your pension earlier and gifting the proceeds, using a trust structure, or taking out life insurance to cover the potential tax bill. The key is to act before April 2027, because after that date, any death benefit paid will be subject to the new rules. A financial adviser can help you model the impact and choose the right strategy.
Preparing for DC guided retirement
From Spring 2027, DC master trusts must offer a default retirement income solution. For other workplace DC schemes, the deadline is Spring 2028. This means your pension provider will be required to offer you a way to turn your pot into a regular income, rather than leaving you to figure it out alone. But the default may not be right for you. If you’re within five years of retirement, start reviewing your options now. The main choices are drawdown (keeping your pot invested and withdrawing income), an annuity (buying a guaranteed income for life), or a mix of both. Your provider’s default will likely be a drawdown product with a managed investment strategy, but if you want an annuity or a different drawdown approach, you’ll need to opt out. The FCA’s new rules on targeted support, due from 6 April 2026, may also give you access to more personalised guidance from your provider.
Managing the salary sacrifice cap
The National Insurance Contributions (Employer Pensions Contributions) Bill will cap the amount of employee pension contributions exempt from NICs when made via salary sacrifice, effective 6 April 2029. The exact cap hasn’t been set yet, but the principle is clear: if you’re sacrificing a significant portion of your salary into your pension, the NIC savings will be limited. If you’re currently sacrificing more than, say, £10,000 a year, start planning now. Options include reducing your sacrifice to the cap level and contributing the rest via a different method, or accepting the higher tax cost and continuing as before. The key is to model the impact before 2029 so you’re not caught off guard when the cap takes effect.
Frequently asked questions
What happens if my DB scheme has a surplus but my employer doesn’t share it? ▾
Does the IHT change apply if I die before age 75? ▾
Can I still take my 25% tax-free lump sum after the IHT change? ▾
What’s the salary sacrifice cap likely to be? ▾
Will my DC provider automatically move me into guided retirement? ▾
What if my DB scheme was affected by the Virgin Media judgment? ▾
The pension landscape is shifting — don’t wait for the rules to settle
The changes coming between now and 2029 are the most significant UK pension reforms in a decade. DB surpluses are being unlocked, inheritance tax is reaching into pension pots, salary sacrifice is being capped, and DC pensions are being forced to help you turn savings into income. Each change on its own is manageable, but together they create a new environment where inaction has a real cost. The window to plan for the IHT change closes in April 2027. The salary sacrifice cap arrives in 2029. And the guided retirement rules mean your DC provider will soon be making decisions for you if you don’t make them yourself.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Rethinking retirement: are traditional pensions still relevant in the UK?.
Sources and Further Reading
The UK’s inflation crisis: strategies to protect your savings — Understand how inflation and interest rate changes affect pension funding and your purchasing power in retirement.
Rethinking retirement planning for a longer, more fulfilling life in the UK — Explore how longer lifespans and changing retirement patterns affect your pension strategy.
WTW (2026). What’s shaping UK pensions in 2026. 🔗
Eversheds Sutherland (2026). What to expect for pensions in 2026. 🔗
