To meet the “minimum” standard of living in retirement, a single pensioner needs £14,400 a year, according to the Pension and Lifetime Savings Association (PLSA).
In reality, they need more. That figure is after tax and assumes they’ve paid off their mortgage or don’t have to pay rent.
As growing numbers carry mortgage debt or pay rent in retirement, it’s a misleading assumption.
That £14,400 figure is outdated anyway, failing to reflect recent price hikes.
But here’s the real problem: anybody relying solely on the state pension already falls well short of that.
The full new state pension is just £11,502 a year, £2,898 below the minimum needed.
The basic state pension, paid to those who retired before April 6, 2016, is even lower at £8,814. That’s a staggering £5,586 short (although many get it topped up with additional state pension).
Even with pension credit, incomes only rise to £11,343, still far below what’s needed.
Now here’s the real killer.
Rachel Reeves has frozen income tax thresholds until 2028, with speculation she may extend the freeze to 2030 in next Wednesday’s Spring Statement.
That would break her previous promise but Rob Morgan, chief investment analyst at Charles Stanley, says the Chancellor’s options are limited. “Having ruled out increases to income tax, national insurance and VAT, she doesn’t have many other choices.”
The personal allowance has already been frozen at £12,570 since 2022. If it had risen with inflation as it should, it would now be comfortably over £15,000 and heading towards £20,000 by the end of the freeze.
Most pensioners wouldn’t be anywhere near breaching the personal allowance. Due to the freeze, millions already do and more will follow every year.
Thanks to the triple lock, the state pension has been rising steadily. In April, it will hit £11,973, just £597 below the personal allowance.
A further increase of just over 5% next year would push it over the threshold.
Morgan said with wages currently rising by around 5%, this is highly likely.
“That would mean a pensioner relying solely on the state pension having to pay tax on a small part of it.”
Now brace yourself for the real madness.
Morgan calls this “administratively messy” as it will drag an unprecedented number of low-income pensioners into the tax system.
That’s an understatement.
The DWP will give with one hand, HMRC will take with the other. It would be complete waste of time for pensioners and an already overstretched HMRC.
And the horror part? As Morgan puts it: “It seems odd that this level of income should be taxed at all.”
It certainly does.
Thanks to Reeves, pensioners struggling to meet even the most basic minimum living standards will now be taxed, pushing them deeper into financial hardship.
It’s madness.
Morgan argues Reeves should rethink, either by raising the personal allowance for older people, or for everyone.
But she won’t. As Morgan puts it: “It stands at odds with the Chancellor’s attempts to increase tax revenue.”
So pensioners scraping by on an income that falls thousands short of a minimum standard of living will have to hand over some of it to HMRC.
And they’ll hand over more every year until 2028. Or possibly 2030. How did it come to this?
