Retirees set to be almost £1,300 better off but there’s a catch | Personal Finance | Finance
new analysis Pioneer It reveals pensioners will be £1,300 better off next year due to the triple lock. September inflation figures are now confirmed at 3.8%; This follows a 4.8% increase in wages, which is likely to affect state pension increases next April.
However, this increase may bring about a significant and unexpected tax liability for some people. The increase would make the new state pension total £12,548 per year, which would be worryingly close to the personal allowance of £12,570.
The personal allowance is the threshold of income that people can earn each year before they are subject to an income tax bill. Although the state pension is not a tax-free benefit, it has remained below the personal allowance for long enough to avoid triggering tax bills for those who simply claim the cash from the DWP.
Personal allowance has been frozen since 2021/2022, when the state pension is below £3,230.80. This meant pensioners could earn over £3,000 from other sources such as employment or private pensions, on top of their full state pension, without triggering a tax bill.
Next year, if the predicted rise proves correct, pensioners will need to earn just £22 elsewhere before having to pay income tax. Chancellor Rachel Reeves will confirm how much the state pension will increase in the Autumn Budget next November.
James Norton, head of pensions and investments at Vanguard, said: “The value of the triple lock is clear because September inflation stands at 3.8% today, meaning the state pension is set to rise to break inflation of 4.8%.
“Our analysis shows that those receiving the full new state pension next year will be almost £1,300 better off thanks to the triple lock than if only the inflation link was available.
“This is good news for pensioners because the state pension is key to most people’s retirement plans and will mean that a large proportion of their essential expenses will be covered by this guaranteed income.
“For those with other sources of retirement income, a careful approach to tax and retirement is needed to ensure you keep as much of your hard-earned savings as possible, given that the personal allowance remains frozen at £12,570 and the high rate tax threshold remains at £50,270.”
Vanguard’s freedom of information request also revealed that almost 2.1 million more people over the age of 66 have become taxpayers since the freeze on personal allowances; This means an increase of 3.1%.
There are ways to legally avoid being subject to income tax in retirement, starting with using any product you own that contains ‘tax wrapping’.
These are schemes such as ISAs that are tax-free in nature and do not count towards your personal allowance. Vanguard experts also advised people to “withdraw only what they need” from their private pensions to avoid unnecessary taxes and deplete their savings.
They explained: “Leaving excess funds in retirement allows for continued tax-free growth and avoids triggering avoidable taxes on savings interest.
“I would like to remind you that you can generally withdraw up to 25% of your pension tax-free, and this doesn’t have to happen all at once, this can be done as soon as you need the income.”
