Pensioners in the UK now need £64,000 more in savings to retire than they did five years ago, according to recent analysis. This increase is due to a phenomenon called fiscal drag, which happens when tax thresholds remain unchanged while incomes rise, pushing more people into higher tax brackets. Over a million pensioners have been moved into the highest tax rate during this period, with others moving into the basic rate or from basic to higher rate. From next year, pensioners who rely solely on the state pension will cross into the basic rate of income tax. However, the government has promised to prevent this from happening. On the other hand, those who delay taking their pension in exchange for a higher rate or have additional income from sources like annuities may not be protected. Annuities are financial products that provide a guaranteed income for life, typically involving a portion of a pension pot paid out in exchange for an annual fixed amount. This amount depends on factors such as annuity rates and the initial cash handed over. Annuity rates have increased this year after being flat for a long time, driven by higher gilt yields due to inflation concerns, political instability, and global conflicts. However, some annuity income may count toward annual allowances, and with frozen allowances, the amount originally required in a pension pot to withdraw the same amount of money has increased by up to £64,000 in some cases. Five years ago, a full state pension was £9,339 annually, and with a £40,000 income from private pensions, the total income would have remained under the £50,270 higher-rate threshold. That threshold has not changed since 2021, but it would have been more than £64,000 today if it had changed in line with inflation. If private pension amounts have kept pace with annual inflation, calculations by LCP show that a £51,200 a year income alongside the state pension, which is now at £12,547, would result in a £63,747 annual total, leaving the pensioner under the theoretical unfrozen threshold and in the 20 per cent tax rate bracket. In reality, though, they will be well above it and paying 40 per cent on £13,477, resulting in an extra bill of £2,695.40 on that portion of the money. To account for that loss, pensioners would need £4,492 extra to make up the difference, with LCP calculations showing that if a pensioner had used the money to buy a 7 per cent annuity, they’d need an extra £64,000 in their original pension pot to get the same eventual post-tax amount in their pocket. Former pensions minister Steve Webb, now of LCP, stated that those planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they had planned to live on will be taxed at 40 per cent or more, and for some that means more pension saving will be needed today to compensate. The issue is not limited to pensioners; everyday workers are also being pushed into the next tax band by rising wages. There is also an "invisible" threshold known as the £100,000 tax trap, which occurs before hitting the additional rate tax bracket at £125,140. At this point, the Personal Allowance tapers off and other allowances such as free childcare also end, creating an effective income tax rate of 60 per cent. New analysis by investing platform IG shows that up to 2.5 million British people could be affected by the £100,000 tax trap by 2031, when income tax thresholds are currently frozen. Michael Healy, CEO of IG consumer, stated that the £100,000 threshold is becoming increasingly detached from reality, having been frozen since 2010 when Gordon Brown was prime minister. He emphasized that a promotion, bonus, or pay rise should not feel like a financial cliff edge and that hard-working professionals are being disincentivized from taking the next step in their careers. He also noted that the outdated tax system is holding back economic growth and should be a priority for the government to address if they are serious about boosting investment in the UK. Ahead of the Budget, financial firms are calling on Andy Burnham and chancellor John Healey to commit to not removing tax advantages around pensions. Sarah Coles, head of personal finance at AJ Bell, stated that the Pensions Commission found that 14.6 million people aren’t saving enough for retirement, but this number rises by 2 million if people take their tax-free cash and spend it. She added that even if they hold onto it until retirement, if it’s in savings, they miss out on the growth potential of investment, and if they have too much to shelter it from tax in ISAs, they risk paying anything from income tax on savings to capital gains tax and dividend tax on investments. Coles concluded that the government should commit to a tax lock, guaranteeing stability on the two core tax incentives in-built in the pension system: Tax-free cash and pensions tax relief.