Clare Moffat, pensions expert at Royal London, explains that thanks to the ‘triple lock’, the full State Pension will rise to £12,014, close to the tax-free threshold of £12,570. This means around 12 million pensioners will receive more in their state pension from this weekend (6 April), bringing them perilously close to the amount that can be received without incurring tax liability. If the ‘triple lock’ continues to rise, the State Pension could soon exceed the personal allowance and be taxable.
“With inflation expected to be 3.2% over the next year, according to predictions by the OBR, and assuming average weekly earnings do not exceed this, the new State Pension would increase to £12,398.57 in 2026/27, which is just 1.4% below the current personal tax allowance. Royal London research found that 21 million people aged 21-65 are unaware that the State Pension is taxable, so it could come as a shock to many. Pensioners receiving additional income from private or workplace pensions will see a reduction in their monthly income payments due to tax deductions.
“Defined contribution pension holders could minimise the tax impact by adjusting their drawdown income, while defined benefit scheme members will likely face increased taxable income as the amount they receive isn’t flexible and cannot be altered. However, while it’s worth remembering that nearly half of pensioners don't receive the full State Pension, there are currently people who only receive the State Pension and already pay tax on it. That’s normally because they’ve delayed taking their State Pension or have larger amounts of Additional State Pension. These people will likely have an increased tax bill. To manage tax liabilities, pensioners could consider taking smaller, regular payments from ISAs, which are tax-free to top up their income. Strategic planning, through financial advice, on how best to withdraw pension funds would help reduce the overall tax burden.”
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