Numi Kent
Millions of UK retirees—especially those born between 1952 and 1960—are facing a double blow to their retirement income.
Two major policy shifts from the Department for Work and Pensions (DWP) and HM Revenue & Customs (HMRC) are converging: changes to contracted-out pension deductions and a frozen personal tax allowance.
Together, these are reducing take-home pay for many pensioners at a time when inflation and living costs remain high.
Let’s break down exactly what’s changing, who it affects, and what pensioners can do to protect their income.
Contracted-Out Pension Adjustments Explained
From 1978 to 2016, millions of workers were “contracted out” of the Additional State Pension (formerly SERPS). This allowed them to pay lower National Insurance contributions in exchange for being part of a workplace or personal pension scheme.
Now, under a revised interpretation of pension entitlement rules, the DWP is tightening how those contracted-out years are calculated. This means larger deductions are being made from expected pension payments, especially for those who worked many years in such schemes.
Example Impact:
A retiree expecting the full new state pension of £236.90/week could see a reduction of £10–£20/week, depending on their contracted-out history. This could amount to £1,000+ annually lost in expected pension income.
Frozen Tax Allowance Adds Further Strain
Since 2021, the UK personal tax allowance has been frozen at £12,570/year. Meanwhile, state pension payments continue to rise, thanks to the triple lock—which links annual increases to the highest of inflation, earnings growth, or 2.5%.
This mismatch is pushing more pension income into taxable territory, catching many off guard.
Pension Income Example (2025/2026):
| Type | Weekly Amount | Annual Amount |
|---|---|---|
| New State Pension | £236.90 | £12,319 |
| Full Basic Pension | £181.40 | £9,443 |
| Total Annual Income | £21,762 | |
| Tax-Free Allowance | £12,570 | |
| Taxable Amount | £9,192 | |
| Estimated Tax Bill | £1,800+ |
The frozen threshold means pensioners who previously paid no tax are now getting surprise tax bills.
3. Who Is Affected Most?
| Birth Year Range | Contracted-Out Impact | Tax Impact |
|---|---|---|
| 1952–1955 | High | Moderate |
| 1956–1960 | Moderate | High |
| Post-1960 | Low | Increasing gradually |
Those born in the early 1950s suffer the most from contracted-out deductions, while later-born retirees are hit harder by tax creep as pensions increase but allowances remain frozen.
How to Lessen the Impact
While you can’t reverse these policy changes, you can take steps to protect your retirement income:
- Check your State Pension forecast on GOV.UK to identify gaps or unexpected reductions.
- Top up National Insurance via Class 3 contributions to boost your state pension if needed.
- Seek tax advice on income-splitting, deferral, or ISA usage to reduce taxable income.
- Apply for Pension Credit if you’re on a low income—it could top up your pension and open access to other benefits.
Is Any Government Relief Coming?
While pension advocacy groups have called for:
- An increase in the personal allowance for pensioners
- A review of contracted-out deduction methods
…the government has not yet committed to any changes. The next Budget or Autumn Statement may offer updates, but pensioners should not rely solely on policy reversal.
For UK pensioners born after 1951, the combination of contracted-out pension reductions and taxable pension creep due to frozen allowances presents a serious financial challenge.
The best defense is preparation: understanding your forecast, adjusting your strategy, and using every tool available to protect your income.
Stay vigilant and informed—this is not just policy change; it’s a shift in how retirement security is defined in the UK.
FAQs
How do I know if I was contracted out of the state pension?
You can check your National Insurance and contracted-out history via your personal account on GOV.UK or request a full state pension forecast.
Can I still top up my National Insurance years?
Yes, you can make voluntary Class 3 contributions for gaps in your record—usually for the last 6 years. Check your eligibility.
Will the personal tax allowance increase soon?
No official plans have been announced. It’s currently frozen at £12,570 until at least April 2028, meaning more pensioners will face income tax each year.