What’s Happening to the State Pension?
Under the government’s “triple lock” system, the State Pension rises each year by the highest of:
Inflation
Average wage growth
2.5%
With wage growth currently at 3.9%, this is expected to drive next year’s increase. As a result, the full new State Pension could rise from around £12,500 to just over £13,000 per year.
On the surface, this looks like a boost for retirees—but there’s a catch.
The Tax Problem: Crossing the Personal Allowance
The current personal allowance—the amount you can earn before paying income tax—remains frozen at £12,570.
This means the State Pension alone could soon exceed the tax-free threshold.
What does this mean in practice?
If your only income is the State Pension, the government has indicated you may not pay tax, although details are still being finalised.
However, most retirees have additional income—such as workplace pensions, personal pensions, or savings.
In these cases, the increase could push you into paying income tax for the first time, or increase the tax you already pay.
In fact, millions of pensioners are expected to be affected as thresholds remain frozen and incomes rise.
Why this matters
This isn’t just about a few extra pounds of tax—it can have wider implications:
1. “Stealth tax” through frozen thresholds
Even modest increases in income can lead to higher tax bills when allowances don’t rise alongside them.
2. Tax on private pension income
State Pension is taxable, and it uses up part (or all) of your personal allowance. This means:
Your private pensions may become taxable sooner
More of your retirement income could be subject to tax
3. Complexity in retirement income
Tax on State Pension is often collected through PAYE on other income sources, which can lead to confusion and unexpected tax bills.
Why Planning Is Essential
The increase in the State Pension highlights a crucial point: it’s not just what you earn in retirement that matters—but how it’s structured.
Without proper planning, you could end up paying more tax than necessary.
How Financial Planning Can Help
As financial advisers, this is where we add real value. A well-structured plan can help ensure your pension works efficiently for you—not the taxman.
1. Managing how you draw income
Careful withdrawal strategies can help:
Keep you within lower tax bands
Reduce unnecessary tax liabilities
2. Making use of tax allowances
There are several allowances that can be used effectively, including:
Personal allowance
ISA allowances (tax-free income)
Spousal planning opportunities
3. Balancing different income sources
Combining State Pension, private pensions, and savings in the right way can significantly improve tax efficiency.
4. Long-term retirement planning
Planning ahead allows you to:
Smooth your income over time
Avoid sudden jumps into higher tax brackets
Maintain control over your finances
Don’t Leave It to Chance
The State Pension increase is good news—but it also introduces new challenges.
With more people likely to face tax on their retirement income, proactive financial planning has never been more important.
By reviewing your pensions, understanding how tax applies, and putting a clear strategy in place, you can make sure your retirement income works as hard as you are.
If you’re unsure how these changes could affect you, it’s never too soon for a conversation.
Our Independent Financial Advisers are always here to answer questions, provide clear guidance and make financial decisions with confidence.
