More and more older pensioners are being hit with extra taxes because of changes made to how pensions are taxed. Experts are warning that Rachel Reeves’ new “retirement tax” is affecting the very oldest people the most. Data shows that nearly half of people aged between 85 and 89 now have pensions big enough to be taxed, compared to only about 22% of those under 85. This mostly impacts people born between 1935 and 1940.
The main reason for this problem is the “triple lock” system, which increases the state pension each year to keep up with inflation, wages, or 2.5% — whichever is highest. While this sounds like good news, it has ended up pushing many pensioners into a situation where they have to pay income tax on their pension. Former Prime Minister Rishi Sunak even called it a “retirement tax.”
Caroline Abrahams, who works with Age UK, says the government should raise the amount you can earn tax-free (the personal allowance) so that the oldest people, who are often struggling with poor health and dwindling savings, aren’t unfairly punished. She pointed out that many very elderly people find it much harder to manage financially than younger retirees.
Another problem is that many of the oldest pensioners are on a different pension system that existed before 2016. This older system let people add extra payments (known as Serps) to their basic pension, which means they now get more money overall — but it also means they are more likely to go over the tax-free limit.
Baroness Altmann, a former pensions minister, warned that even more pensioners could end up owing tax if pensions keep rising but the tax threshold stays the same. She also worried that the oldest pensioners might struggle with filling out tax forms, leading to fines or penalties just for small mistakes.
Another former pensions minister, Steve Webb, said that soon, almost everyone getting a new state pension will have to pay tax, even if they have no other income. He explained that if your pension mostly comes from the state, it’s very easy to end up over the limit and into the tax-paying group.
Experts predict that by April 2027, anyone on the new state pension will be earning more than the current £12,570 tax-free limit.
In response to these concerns, a spokesperson for HM Treasury said that the government is committed to supporting pensioners. They pointed out that they have frozen fuel duties and increased pensions to make pensioner couples about £88 a month better off. They also said that their commitment to the triple lock means millions of pensioners will see their payments rise by up to £1,900 during this Parliament.
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