A pensioner who worked as an engineer for over 60 years says he feels let down by the new “two-tier” system which could tax the state pension for those who also have private pots.
After freezing income tax thresholds at the Budget, Chancellor Rachel Reeves confirmed people rely only on the state pension will not pay tax once the triple-lock allowance rises above the personal tax-free allowance in 2027. The state pension will rise in line with wage growth at 4.8 per cent.
Critics have accused the Labour government of creating a “two-tier” pension system, because people with private pension pots will have to pay income tax.
Budget documents published by the Treasury included a commitment to “ease the administrative burden for pensioners whose sole income is the basic or new state pension”, which would apply only to those who did not receive the second state pension or any other uplifts.
Former pensions minister, Steve Webb, told The Times, the system will penalise those who have set money away in their private pension and bring “all sorts of unwelcome side-effects”.
“At a time when the government apparently wants more people to save for their retirement, punishing people for small amounts of pension saving sends the wrong signals entirely,” he said.
Once the state pension is dragged above the income tax threshold of £12,570, which it is expected to by April 2027, pensioners will be taxed 20% of any allowance above this figure.
‘Pensioners miss this money more than the Government’
Alec McFadden, a former engineer who retired late at the age of 73, told The i Paper the new policy penalises those who have worked all their lives and built up a private pension pot.
He said: “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.
“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.
“The triple lock is the best thing that happened under the [coalition] government, but nobody thought at the time you’d end up paying tax on it.”
The Treasury says they are exempting those solely on the state pension from income tax so pensioners will not have to “pay small amounts of tax”.
News! From 2027, the full new state pension will be higher than the tax-free allowance, so tax is due. The Chancellor had said people wouldn’t need to do assessments, but on my show tonight, Rachel Reeves said, they won’t pay tax at all this parliament. Watch the full show &… pic.twitter.com/Uo176F0xm1
— Martin Lewis (@MartinSLewis) November 27, 2025But McFadden criticised the Government for planning to claim these amounts back from pensioners who have built up private pots.
Pensioners being charged income tax would pay £58 in April 2027, rising to £256 by 2029, according to The Times.
Mr McFadden said: “I think it’s a mistake. The individual pensioner misses that money much more than it benefits the government.”
After working on shipyards in northern England, Mr McFadden worked abroad in Germany, Italy and Malta and has now returned to Sunderland.
He said: “When we lost all the engineering and shipyards, 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 penalised, and that’s exactly what’s happening.”
Mr McFadden, who campaigns on pension issues, said he thinks it is wrong that he is charged 20 per cent on his private pension: “I’m being taxed on the pension that I saved, and I just cannot see the logic of that.”
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He said he has lost trust in Labour because of the Government’s attitude towards pensions and the scandal over winter fuel payments for pensioners, meaning he is 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 comment.
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