A significant policy change affecting millions of state pensioners has been sharply criticised as a form of 'means-testing by proxy' by a leading pensions expert. The controversy centres on the government's decision to freeze the income tax personal allowance, which will create an uneven playing field for retirees from April 2027.
The Core of the Controversy
Pensions specialist Tom McPhail has strongly condemned the approach taken by the Labour Party government. He argues the policy is not driven by fiscal sense or fairness, but by political fear. "The government is not doing this because it makes fiscal or practical sense, or is fair or sensible," McPhail stated. "It is doing it because it is so frightened of crossing that totemic threshold of pensioners paying income tax on the state pension because they decided to freeze it."
The issue stems from the interaction of the rising state pension and the frozen tax threshold. The full new state pension will rise to £12,548 in April 2025 under the triple lock. Projections indicate that with a minimum 2.5% annual increase, the payment will reach approximately £12,862 by 2027. This figure will breach the long-frozen personal allowance of £12,570.
Creating a Two-Tier Pension System
The shake-up means retirees who rely solely on the state pension will avoid income tax, as their entire income comes from this source. However, those with even modest additional private savings or income will be pushed over the threshold and face a tax bill. Former Liberal Democrats pensions minister Sir Steve Webb, now a partner at consultancy LCP, warned the policy would generate "all sorts of anomalies, cliff-edges and unfairnesses."
"This is taxing people who have just got a little bit of private saving more heavily," Sir Steve explained. He highlighted a critical flaw: "There is a risk of a two-tier system where people on the new state pension are protected whilst people on the old system and whose total pension is exactly the same are not protected."
He pointed out that over two million pensioners on the old state pension system already have incomes above the tax threshold, a situation he claims successive governments have ignored.
Broader Consequences and Expert Warnings
Mike Ambery, retirement savings director at Standard Life, echoed concerns about fairness. "There are undoubtedly questions of fairness for those receiving small incomes from elsewhere who may end up paying a small amount of tax," he noted. Ambery also warned of a potential unintended consequence: "Pre-retirement age poverty is on the rise and a system like this would give people a small incentive to take any modest pension pots early."
This incentive could undermine long-term retirement planning, encouraging individuals to access savings prematurely to avoid a complex and perceived unfair tax hit on a marginally higher income. The policy, therefore, stands accused not just of creating immediate inequity between pensioners, but of potentially distorting financial behaviour in a way that harms future retirement security.
The debate underscores the difficult trade-offs in pension and tax policy, where protecting one group from a symbolic tax milestone can inadvertently penalise others who have sought to supplement their state pension with additional, often modest, savings.
