I already get my state pension – can I avoid it being taxed next year?

In our weekly series, readers can email in with any questions about retirement and pension savings to be answered by our expert, Rachel Vahey, head of public policy at investment platform AJ Bell. There is nothing she does not know about pensions. If you have a question for her, email us at money@theipaper.com. Question: I have been receiving my state pension for a couple of years now. It’s been really good to see it increase steadily over that time. But I have seen a couple of articles that it will be taxed next year. Is that right? What can I do to avoid that? Answer: The state pension is the foundation of many people’s retirement income, so it is important to understand how much you may receive, how it increases and when tax could become due. Shorts The full new state pension is currently £241.30 a week, or around £12,548 a year. The amount you receive depends on your National Insurance record, and you will usually need 35 qualifying years to get the full rate. The state pension age is also gradually rising from 66 to 67 by March 2028. The state pension is taxable income, but it is paid without tax being deducted. The personal allowance is currently £12,570, which is only around £22 more than the full new state pension. Therefore, someone whose only income is the full new state pension should not currently have tax to pay. The state pension increases in line with the triple lock guarantee. This is the highest of the increase in prices, the average increase in earnings or 2.5 per cent. The increase in the state pension in April was about £575 a year. It’s too early to say yet what the increase in April 2027 will be; we are still waiting for some government figures. The rise in prices is measured as the increase in the Consumer Price Index (CPI) in September which will be announced in October. Inflation is currently 2.9 per cent, although it is expected to edge up a bit more over the next couple of months. The rise in earnings is the average growth in total wages for the period between May and July. This will be announced next month. However, the latest earnings figure for the three months to June, published last week, was 4.1%. This means that if the wage figures stay at their current level – or higher – next month, the state pension will rise to over £13,000 a year. And with the personal allowance remaining frozen at £12,570, this could mean some people could be taxed for the very first time. However, Andy Burnham and John Healey have recently said that those who are solely receiving the new flat rate state pension would not see their state pension taxed for the rest of this Parliament. The expectation is that John Healey will clarify in the Budget in October exactly how this will work in practice. However, it does raise questions of fairness – why should those who have saved for a private pension face their full tax rate but those who didn’t escape paying tax, even if they receive exactly the same income? For now, check your state pension forecast and review all your income sources rather than looking at the state pension in isolation. If you have other taxable income, consider spreading any private pension withdrawals across tax years and using tax-free ISA income where appropriate. For more complicated circumstances, a regulated financial adviser can help you plan withdrawals without accidentally creating a larger tax bill.