Payments for the state pension go up in April
Key changes to the state pension are coming in(Image: Getty)
People planning for their retirement and state pension may want to some key changes to savings rules that are coming up soon. Chancellor Rachel Reeves set out several major changes to savings policy in the Autumn Budget, including raising tax rates on interest earnings and limiting certain allowances.
One crucial policy shift taking effect from April 2027 is that the £20,000 ISA allowance will effectively be reduced. Under the new rules, savers will only be permitted to deposit up to £12,000 annually into these tax-free accounts, split as they choose between cash ISAs or stocks and shares ISAs. The remaining £8,000 must be directed towards investment-based ISAs.
However, those aged 65 and above will be exempt from this change and will maintain the previous ISA allowance, being able to deposit up to £20,000 however they wish across different ISA types. This creates an interesting anomaly as state pension eligibility begins a year later, at age 66.
The state pension can provide a healthy boost to your income when you start claiming, currently paying £230.25 weekly for the full new state pension. Payments will rise by 4.8 per cent this April, increasing the full new state pension to £241.30 weekly.
Andrew Prosser, head of investments at investing platform InvestEngine, said: “Using a fixed age of 65 rather than linking the exemption to the state pension age does potentially create a problem over time. As the pension age rises, the gap between the two will widen, meaning some people qualify earlier than retirement age whilst others miss out.
“Tying the exemption to the state pension age would have been a more logical and future-proof approach. That said, pushing the age too high risks excluding those with a genuinely shorter investment horizon, so there’s a balance to strike.”
The state pension age is set to rise gradually from April 2026, reaching 67 by April 2028. Plans are also in place for the state pension age to climb from 67 to 68 between 2044 and 2046. There have been proposals to bring forward this schedule, as outlined in an earlier state pension age review, but this suggestion was not taken up.
Labour confirmed in 2025 that another review of the state pension age would take place. The rationale behind cutting the cash ISA allowance was to push people towards investing, with older savers exempt due to having limited time to see returns on their investments. However, some older savers may view their ISA holdings as a means to pass on their wealth to future generations.
On this topic, Mr Prosser said: “There is a risk that this kind of policy reinforces the idea that savings are only there to be spent within your own lifetime, rather than also being a way to build longer-term wealth. In reality, many people use ISAs not just for spending in retirement, but to support family or pass wealth on.
“Discouraging investing later in life could unintentionally limit those longer-term benefits, particularly as people live longer. A more flexible approach that supports both spending and continued investing would better reflect how people actually use ISAs.”
More tax to pay
The investment expert fears that savers could end up paying more tax under the new allowances. He said: “For under-65s who prefer holding over £12,000 in cash, the cap may mean that beyond that level, they keep extra cash outside an ISA in taxable accounts.
That friction may either translate into ‘why bother saving more cash?’ and more consumption, or it could result in cash holders paying more in tax. Neither is a good outcome for those looking to build long-term wealth.”
Another worry here is that the tax rate you pay on your savings is going up. Also from April 2027 when the ISA allowance changes take effect, the tax rates paid on savings interest will increase by two percentage points.
This will raise the rate for basic rate taxpayers from 20 per cent to 22 per cent, for those on the higher rate from 40 per cent to 42 per cent, and for the additional rate from 45 per cent to 47 per cent. Explaining how ISA savings can work alongside your pensions, Mr Prosser said: “For people approaching retirement, ISAs can play a valuable role alongside pensions.
“Using both can create a more balanced retirement plan, combining the upfront tax relief available on pensions with the flexibility of tax-free ISA withdrawals. Together, they give people greater control over how and when they access their money.
“ISAs can be particularly helpful for those planning to retire early. Because they can withdraw money at any age, ISAs can help fund the years before pension access is available.
“The main limitation is the lower annual allowance compared to pensions, but that flexibility can be extremely valuable.” Under the standard allowances, you can put away up to £60,000 annually into pensions, which is considerably above the £20,000 yearly limit for ISAs.