Andy Burnham kicks state pensioners off cliff – like Rachel Reeves | Personal Finance | Finance

State pensions are being thrown into disarray due to a long freeze on the tax-free personal allowance of £12,570, which is now valid until April 2031, thanks to Rachel Reeves. While the allowance remains frozen, the state pension will continue to rise under the triple lock, increasing each year by consumer price inflation, earnings or 2.5%, whichever is higher. This causes tax problems for retirees.

Today, the full new state pension is £12,547 per year, marginally below the personal allowance. Even with a backstop increase of 2.5%, the lowest possible amount, it will reach £12,861 next April. This is £291 more than the personal allowance. This figure is likely to be even higher as the Iran war and rising oil prices threaten to push up inflation. Between now and 2031, the state pension will continue to rise above the individual allowance.

Reeves’ solution to this conundrum was a quick one. He promised that retirees whose sole income comes from state pensions will not pay income tax during this Parliament term. It sounded reassuring, but it opened a nasty can of tax worms. There are two state pension systems operating side by side in the UK. Millions of people reaching state pension age receive the new state pension from 6 April 2016. If they have absolutely no other taxable income, Reeves’ commitment pretty much works for them.

However, as I explained on Saturday, the situation of elderly retirees is different. They receive the basic state pension, which has a significantly lower value, but many also receive additional state pensions through SERPS, or the state’s second pension. These extra payments are taxable. If they increase their total state pension income above the personal allowance of £12,570, the pensioner becomes liable for income tax on their state pension above this threshold, even if they have no other income.

Conclusion? Only one in 20 retirees will benefit from Reeves’ so-called solution. Burnham didn’t create this mess. But he inherited it and chose to achieve it. And now there is a second problem.

Incredibly, Reeves’ quick fix would penalize those who do the responsible thing and save for retirement with a huge tax fee. Low-income retirees with very little savings are now on the brink. Reeves and Burnham’s commitment to being tax-free collapses as soon as they earn any income from a private pension, savings interest or part-time work.

They just won’t pay taxes on this extra source of income. They will also face tax on the part of their state pension above the frozen personal allowance.

Analysts at pension experts LCP predict that the entire new state pension could be worth £13,671 by 2029-30. That’s £1,101 over the personal allowance. There is still no tax bill for new state retirees who have no other source of income. But the situation is different for those who do this. What’s more, just £1 of additional income can trigger a punitive tax bill of around £220.

Reeves’ plan has created one of the sharpest gulfs in the entire UK tax system. And now Burnham and new Chancellor John Healey have kicked the retirees on this one.

For years, governments have urged people to save for retirement and reduce pressure on the state. Reeves has somehow created a system in which retirees who save modestly may be worse off than those who save nothing. Now Burnham has made it happen.

The new Prime Minister has a lot on his plate and there is no easy solution to the mess Reeves has created. Burnham will hope retirees don’t notice. But as tax thresholds are frozen each year, the impact on low-income retirees with modest savings will increase. Reeves prepared this disaster. Burnham put the final touch.