The Pensioner’s Disappointment with the New System
A pensioner who dedicated over 60 years of his life to engineering has expressed deep disappointment with the new “two-tier” pension system. This system could potentially lead to higher taxes on state pensions for individuals who also have private pension pots.
The recent Budget announcement by Chancellor Rachel Reeves froze income tax thresholds, which means that those relying solely on the state pension will not face taxation once the triple-lock allowance surpasses the personal tax-free allowance in 2027. The state pension is set to increase by 4.8% in line with wage growth.
Critics argue that the Labour government’s approach is creating a “two-tier” pension system. This is because individuals with private pension pots will be required to pay income tax, while those solely dependent on the state pension will not.
Budget documents from the Treasury included a commitment to ease the administrative burden for pensioners whose only income comes from the basic or new state pension. This would apply specifically to those who do not receive the second state pension or any other additional benefits.
Steve Webb, a former pensions minister, highlighted concerns about the system, stating that it penalizes those who have saved money in their private pensions and may result in “all sorts of unwelcome side-effects.” He emphasized that at a time when the government encourages more people to save for retirement, punishing individuals for small amounts of pension savings sends the wrong message entirely.
Once the state pension exceeds the income tax threshold of £12,570, which is expected to happen by April 2027, pensioners will be taxed at 20% on any amount above this figure.
A Personal Story of Discontent
Alec McFadden, a retired engineer who started his career late at the age of 73, shared his frustration with the new policy. He believes it unfairly targets those who have worked hard throughout their lives and built up private pension pots.
McFadden explained, “It just seems absolutely crazy that with the tax threshold staying where it is, every time we get an increase, we end up paying 20 per cent of the increase.” He added, “It would be better to get a smaller pay rise, tax free, than what’s happening now, giving you the money then stealing 20 per cent back.”
He praised the triple lock as the best policy under the previous government but pointed out that no one anticipated the possibility of being taxed on it. The Treasury claims that those solely on the state pension will be exempt from income tax, ensuring they do not have to “pay small amounts of tax.” However, McFadden criticized the government for planning to reclaim these amounts from pensioners with private pots.
According to The Times, pensioners charged income tax would pay £58 in April 2027, increasing to £256 by 2029. McFadden said, “I think it’s a mistake. The individual pensioner misses that money much more than it benefits the government.”
A Life of Hard Work and Disillusionment
McFadden, who worked on shipyards in northern England before moving abroad to Germany, Italy, and Malta, has returned to Sunderland. He described his experience of losing engineering and shipyard jobs, emphasizing that he did not sit idle but instead sought work elsewhere.
“I didn’t sit at home on the doll. I went abroad and worked. And it seems to me that people like me shouldn’t be penalized, and that’s exactly what’s happening,” he said.
As someone who campaigns on pension issues, McFadden feels it is unjust to be taxed on the pension he saved. “I’m being taxed on the pension that I saved, and I just cannot see the logic of that.” He has lost trust in the Labour government due to its attitude towards pensions and the scandal involving winter fuel payments for pensioners, making him unlikely to vote for them again.
“I can’t see many people [my age] voting for the present government. I think there’s a view that they’re taking advantage of us. I’ve joined Your Party. It’s a party interested in workers.”
The Treasury has been contacted for further comment.