Nearly half of retirees to be hit by Inheritance Tax bill
- TBA
- Jun 13
- 4 min read
Did you know? Even the State Pension issued by the government can be subject to tax. Nearly half of retirees to be hit by Inheritance tax bill.
According to data analysis, approximately 46% of individuals aged 85 to 89 receive a State Pension that exceeds the £12,570 tax-free personal allowance, meaning they must pay income tax on their pension income. For retirees aged 90 and above, this figure stands at 45%.
Among those under 85, around 22% are also taxed on their State Pension income — effectively subject to a so-called ‘retirement tax’.
Experts have warned that continued taxation on pension income could place additional burdens on the oldest and most vulnerable members of society.
Let’s take a closer look at the real concerns behind pension taxation for retirees aged 85 and above.
Inheritance Tax bill: State Pension and Income Tax
The State Pension counts as taxable income and must be included in total income when calculating income tax.
For the 2024/25 tax year, the personal allowance remains at £12,570. If a retiree's State Pension combined with other income (such as savings interest, rental income, or private pensions) exceeds this threshold, the excess is taxed at the applicable income tax rate.
For example, the full new State Pension in 2023 is £203.85 per week (around £10,600 per year). With just modest additional income from savings or private pensions, it’s easy to surpass the tax-free threshold.
Inheritance Tax bill: Private Pensions and Income Tax
When withdrawing from private pensions (such as workplace or personal pension schemes), 25% can be taken tax-free, while the remaining 75% is taxed at your income tax rate.
If retirees aged 85 and above withdraw large lump sums to cover medical or care-related expenses, their taxable income could increase significantly, pushing them into a higher tax band.
For instance, withdrawing £100,000 from a private pension would leave £75,000 subject to income tax at progressive rates.
The impact of savings and investment income
After a lifetime of work, many over-85s may own property, savings, or investments, which generate capital gains, interest, or dividends — all of which may be taxable.
For instance:
Rental income is taxed at 20–45%
Interest over £1,000 is taxable
These, combined with State Pension income, can easily push total income well above the personal allowance.
Income thresholds affecting benefit entitlement
Eligibility for certain benefits (e.g. Pension Credit, Housing Benefit) is income-dependent. If income exceeds the set thresholds, retirees may lose eligibility for these benefits — effectively creating a hidden tax.
For example, the Pension Credit threshold for a single person is £192.60 per week. If income exceeds this, benefits are reduced by £1 for every £1 over, equating to a 100% marginal tax rate.
Other policies
1. ‘Triple Lock’ policy
The Triple Lock mechanism, introduced in 2011 by the Conservative–Liberal Democrat coalition, aims to ensure that the State Pension rises each year by the highest of the following three:
Consumer Price Index (CPI) inflation
E.g. In April 2023, CPI reached 10.1%, and pensions rose accordingly.
Average earnings growth
E.g. In April 2024, average wages rose 8.5%, so pensions increased by that amount.
Minimum guarantee of 2.5%
This ensures the State Pension keeps pace with inflation, wage growth, and other economic factors.
2. Personal allowance frozen until 2028
Since 2022, the government has frozen the personal allowance, with no increase planned until 2028 at the earliest.
Even though pensions are rising due to the triple lock, taxable income may grow faster than the frozen threshold.
For instance, if the pension rises by 3% annually, by 2028, it could reach nearly £12,000, meaning even a small amount of other income could push retirees above the £12,570 threshold.
3. Compounding tax policy effects
In recent years, the government has sought to increase revenues through various tax changes:
From 6 April 2025, employers' National Insurance will rise to 15%, potentially affecting workplace pension contributions.
Capital Gains Tax (CGT) has increased, with the top rate rising from 20% to 24%
Inheritance Tax and reductions in tax relief have also increased burdens for retirees.
The Institute for Fiscal Studies (IFS) forecasts that by 2028, the frozen allowance will bring 4 million more people into the tax net, including 3 million at higher rates.
Among over-85s, 45% have private pension or investment income, often pushing total income over the tax threshold.
Case studies
We have prepared some examples demonstrating how the income tax rules could affect your pension.
Case 1:
An 85-year-old receives a State Pension of £10,600, £2,000 interest, and a £5,000 private pension. Total income: £17,600Taxable amount: £5,030Tax due: £1,006 (at 20%)
Case 2:
An elderly person withdraws £200,000 from a private pension for care costs. £150,000 is taxable. Adding their £10,600 State Pension, total taxable income is £160,600.They may pay up to 45% tax on a large portion of this — a significant hit to retirement funds.
Some advice from TB Accountants
1. Strategic Withdrawals
Withdraw pension funds in low-income years to make the most of lower tax bands.
Consider converting some pension funds into tax-free ISAs to reduce exposure.
2. Use Tax-Advantaged Accounts
Invest through a SIPP (Self-Invested Personal Pension) for tax deferral.
Use Lifetime ISAs (LISAs) for tax-free retirement or home purchase funds.
3. Seek Professional Advice
Pension income is a crucial part of retirement planning. If your finances involve international pensions or high-value assets, consult a qualified tax advisor to avoid unnecessary liabilities.
For individuals and businesses looking for UK taxation services, use our contact form to get in touch for more information.
Get in touch with us at info@tbgroupuk.com or for a free one-to-one consultation.
