Analysis by finance experts, RIFT, has revealed that by staggering the withdrawal of their private pension and utilising their 25% tax free allowance, the average pensioner can ensure their private pension pot lasts an average of 7 years, without having to pay income tax.

In the March Budget 2021, then Chancellor Sunak announced that the government was freezing both the personal allowance and higher-rate tax thresholds at 2021-2022 levels, a decision that was extended by Jeremy Hunt at the end of last year to run until 2027-28.

This means that as nominal earnings grow, millions of more people will be pulled into both the income and higher-rate bands of tax.

In fact, analysis by the OBR shows that today (2022-23), an estimated 34.6m people now pay income tax, an increase of around 500,000 people as a direct result of these tax threshold freezes. By 2027-28, this number is estimated to have increased to 38.2m, meaning that 3.2m more people will be brought into income tax compared to what this total would have sat at with indexation and no tax threshold freezes.

What’s more, an estimated 400,000 more people have already been pulled into the higher-rate tax band today, with this number again expected to climb to 2.1m more people paying a higher rate of tax by 2027-28 than there would have been with indexation and no threshold freezes.

Those of working age are set to be hit hardest, but the freeze to tax thresholds also has implications for those trying to get by on their pension.

Currently, the full state pension sits at £10,600 per year, just £1,970 off of the income tax threshold of £12,570.

The average private pension pot across the UK comes in at £17,379. However, what many pensioners may not realise is that while they can take 25% of their pension pot free of tax, they don’t have to take this all in one go.

Therefore, if they set their gross annual private pension withdrawal at £2,627, only £1,970 will contribute to their personal allowance, allowing them to stay within the £12,570 income tax threshold and avoid paying tax on their hard earned pension. Based on the average UK private pension pot of £17,379, and at current allowances, this would see their private pension stretch over a total of seven years without paying a single penny in tax.

There are other ways you can make your pension work harder for you without the requirement of paying tax.

Lower earning pensioners taking a pension of less than the £12,570 income tax threshold each year are also eligible to take as much as £5,000 in savings interest completely tax free. While it’s unlikely that anyone would accrue £5,000 in interest, even in today’s climate, it’s still handy to know that this interest can be utilised tax free.

Pensioners are also within their rights to utilise the £20,000 tax-free ISA allowance. This means that any savings interest, dividends income, or capital growth that comes via an ISA investment can help boost your pension pot free without pushing you above the tax threshold.

Bradley Post, MD of RIFT, commented:

“Tax threshold freezes are set to impact us all and while pensioners will be less affected, it certainly pays to know where you stand with the tax man and what you might owe if you creep above the income tax threshold.

The good news is that there are ways that you can sidestep the income tax trap and the best way to start is by utilising your 25% tax free pension pot allowance over a longer period of time, allowing you to benefit from your hard earned private pension for many years without paying a penny to the taxman.”