State pensioners born after 1951 are being warned about a new HMRC tax limit that leaves them with just £22 of tax-free income. The standard UK income tax Personal Allowance is currently £12,570, meaning earnings up to this amount each year are tax-free. However, the new full state pension for younger pensioners is £12,548 in 2026/27, leaving only £22 of tax-free income before any other pension withdrawals are taxed.
Who Is Affected?
This limit applies to new state pension claimants born after 1951 for men and after 1953 for women. Antonia Medlicott, founder of Investing Insiders, warns that many people forget this and it can seriously affect pension plans. Almost everything withdrawn from a pension will be taxed at 20%, rising to 40% if income exceeds £50,270.
How to Reduce Your Tax Bill
Medlicott advises that one simple way to reduce tax is to coordinate withdrawals with a partner. If one partner has a lower income, spreading withdrawals between both can keep you in lower tax brackets, potentially saving hundreds of pounds.
Withdrawal Strategies
When taking money from a pension, it's important to withdraw only what you need and ensure the pot lasts. For a £600,000 pot growing at 4% annually, withdrawing £25,000 a year leaves £488,000 after 30 years. Withdrawing £30,000 leaves £196,000, but £35,000 runs out after 28 years, and £40,000 after about 22 years. The sweet spot for most people is between £25,000 and £32,500 annually, providing a comfortable standard of living while staying under the £50,270 tax bracket and lasting 30 years.
Inheritance Tax Changes
From April 2027, pensions are expected to fall under estates for inheritance tax, so leaving extra cash in a pension may no longer be a sound strategy. Medlicott recommends regularly reevaluating your drawdown plan.
Using ISAs
Building a Stocks and Shares ISA alongside a pension is a smart move. Withdrawals from ISAs are tax-free, allowing you to combine them with pension income to minimize taxable income. This straightforward strategy is often underused.
