An expert has warned that, even though state pensions are due to increase, hundreds of thousands of retirees will be left on the brink of paying income tax on even modest extra earnings. The state benefit will jump by 4.7% next April to about £12,534.60 a year. However, that figure sits barely £35 below the frozen £12,570 personal allowance, Nigel Green, chief executive of global financial advisory firm deVere Group, said.
“The state pension is now almost level with the personal allowance,” the expert said. “Any private pension income, savings interest or taxable benefits will push people over the threshold. Many who have never paid tax in retirement will soon find themselves in HMRC’s sights.” Mr Green pointed out the triple lock, which raises pensions by the highest of inflation, wage growth or 2.5%, has driven this increase, and, with the allowance frozen until at least 2028, the two policies are “colliding”.
“If nothing changes, the state pension will overtake the personal allowance entirely within a few years,” Mr Green added.
“That would make every pound of additional income taxable for millions.”
The expert called the combination a “stealth tax”, which “punishes those who planned responsibly and undermines confidence in retirement planning”.
He added: “Freezing the allowance is an invisible tax rise.
“It lifts revenue without headlines, but it falls hardest on those with fixed incomes—the very group the triple lock was supposed to protect.”
It comes as Rachel Vahey, head of public policy at AJ Bell, reported a surge in the amount of pension money accessed in the 2024/25 tax year, which surpassed £70billion for the first time.
This was a 36% increase on last year, according to new data from the FCA.
She said people “aren’t making decisions based on what’s best for them but because they are worried about possible changes to pensions tax incentives from the Government”.
Ms Vahey added: “Speculation surrounding the fate of pensions tax-free cash ahead of Chancellor Rachel Reeves’ inaugural Budget last October led to an increase in people accessing their cash out of fear they may lose some of it to a change in policy, potentially causing untold damage to their long-term retirement plans.
“Alongside this, the announcement that unused pensions would be subject to IHT from April 2027 has led many to review their overall estate planning, possibly withdrawing pension money to spend or gift to loved ones.”
She called on the Chancellor to commit to a Pensions Tax Lock, pledging not to make any changes to pensions tax incentives for the remainder of this Parliament.
“The number of people choosing drawdown increased by a staggering 26% last year, perhaps reflecting that more wanted to bank their tax-free cash under the current rules before any possible tax regime changes were introduced,” Ms Vahey said.
