State pensioners could face an unexpected tax bill as rising State Pension payments leave little room in the tax-free allowance, according to a financial expert. Even small withdrawals from additional pension savings could trigger a tax liability, urging retirees to plan carefully.
HMRC Tax-Free Allowance Squeezed
In the 2026/2027 financial year, individuals receiving the full new State Pension of £12,548 annually will find this sum almost entirely consumes the £12,570 tax-free Personal Allowance set by HMRC. This leaves just £22 of tax-free income before any withdrawals from other pensions are taxed. The warning comes from Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, as reported by GB News.
Medlicott explained: "The standard UK income tax Personal Allowance currently sits at £12,570, so everything you earn up to this amount each year is free of tax. However, your State Pension is also included in this amount at £12,548 in 2026/27, so you're left with just £22 of tax-free income before making a single withdrawal from any other pension. This is something that many people forget and can seriously affect your pension plans if not accounted for."
Key Considerations for Retirees
Medlicott highlighted four critical factors for anyone preparing to access retirement savings. First, retirees must account for the limited tax-free allowance. Second, from April 2027, pensions are expected to become part of estates for inheritance tax purposes, which could affect estate planning. Third, it is essential to regularly review drawdown plans rather than leaving initial strategies unchanged. Fourth, withdrawing the correct amount is crucial.
She elaborated: "When taking any amount of money out of your pension, it's important to keep two main things in mind: taking out only as much as you need, and making sure it will last. For example, with a £600,000 pot growing at 4% a year net of charges, withdrawing £25,000 a year will still leave you with £488,000 in the pot after 30 years. At £30,000 a year, you'll be left with £196,000. But rise to £35,000 and your pot runs out after 28 years, reducing to around 22 years if you withdraw £40,000 annually."
Broader Implications
The warning comes amid broader changes to pension rules, including the inclusion of pensions in inheritance tax calculations from 2027. Retirees are advised to seek professional financial advice to navigate these complexities and avoid unexpected tax bills. The HMRC update serves as a reminder that even modest additional withdrawals can have significant tax consequences when the Personal Allowance is nearly exhausted by the State Pension.
