Retirement tax allowance: what’s in it for pensioners?

The abolition of the 10% tax allowance on retirement pensions, mooted as part of the Finance Bill for 2026, continues to be debated.

Presented as a measure of tax justice and budgetary efficiency, it raises questions about its concrete effects for pensioners as of next year. OFCE's analysis, published on January 9, 2025, sheds some light on the impact of this tax reform on retirees.

A tax system called into question in a context of budgetary stringency

Introduced in 1978, this tax break for pensioners is designed to compensate for the drop in income suffered by retired people. The 10% tax allowance on pensions provides an automatic tax reduction for all taxpayers declaring retirement pensions.

But in a context marked by a high public deficit (5.8% of GDP in 2024) and a target of 40 billion euros in savings by 2026, the government is considering its abolition. This pension tax reform would generate an estimated budgetary gain of between 4 and 5 billion euros a year.

The good news is that, in the short term, this tax allowance for retirees will be maintained in 2025.

A reform motivated by the quest for intergenerational equity

The executive, through the Minister of Public Accounts, maintains that this reform aims to rebalance the tax contribution between working people and retirees. The government's aim is to avoid increasing the pressure on earned income, and justifies this measure by the need to reinforce the fairness of the system.

The aim would be to make the wealthiest pensioners contribute more, while trying to preserve small pensions. The measure is in line with a desire for tax fairness and to adapt the system to demographic changes.

What will be the impact on retirees if the tax allowance disappears?

TheObservatoire français des conjonctures économiques (OFCE) published a study on January 9, 2025 simulating the effects of this measure at different levels of declared income. Several key findings emerged:

• No impact for non-taxable pensioners: if the tax household declares less than 19,500 euros in annual income, there will be no additional tax. The abolition of the allowance does not generate any tax if none is initially due.
• Between €19,500 and €25,500 of income, the additional tax would remain moderate, on the order of a few dozen euros.
• From €25,500 to €30,000, the additional tax would be around €200.
• From 30,000 to 39,000 euros, the increase would be less than 500 euros.
• Above 55,000 euros, the impact becomes significant, up to an additional 900 euros for a household with an annual income of 100,000 euros.

These results highlight the gradual impact of the reform, felt more keenly by middle- and higher-income retirees.

Opponents see this measure as a disguised form of solidarity contribution imposed on pensioners, in addition to existing levies on pensions.

Retirement pensions are already subject to several contributions:

• Income tax, deducted at source ;
• CSG: rates of 3.8%, 6.6% or 8.3% depending on reference tax income;
• CRDS: 0.5% ;
• CASA: 0.3% ;
• Health insurance contribution, in certain specific cases.

The abolition of the allowance would increase the reference tax income, which could lead to an increase in social security contributions and the loss of certain conditional benefits (energy cheques, MaPrimeAdapt, etc.).

Effects for retired households per twentieth of living standard

Source: OFCE - January 9, 2025

Anticipating the end of the tax allowance: boosting retirement savings

Against a backdrop of growing uncertainty about future pension levels, the abolition of the tax allowance reinforces the urgent need to anticipate a potential drop in retirement income. Such a measure, if implemented, will affect the purchasing power of retirees, even if small pensions are excluded. It is in working people's best interests to build up capitalized savings to supplement compulsory pay-as-you-go schemes.

Retirement savings schemes such as individual, group or compulsory PERs help diversify sources of retirement income and ensure greater resilience in the face of successive reforms to the system. Indeed, those who have subscribed to a PER can continue to rely on their savings to supplement their income. Projections by the Conseil d'orientation des retraites show that returns on pay-as-you-go schemes could be less favorable in the future.

The role of companies in preparing for retirement

The reform of the tax allowance for retirees also reminds us that companies have a strategic role to play in preparing for retirement:

• Setting up company retirement savings schemes(PER Collectif, PER Obligatoire, Article 39)
• Employee awareness and information campaigns
• Set up and optimize employee savings schemes with matching contributions to boost employee savings efforts.

This support is a real lever for attractiveness and loyalty, at a time when securing future living standards is becoming a priority for employees. You have the opportunity to support your employees' financial health.

To sum up, the abolition of the 10% tax allowance, while still uncertain, is part of a drive to restore public finances and tax fairness. While it will not affect non-taxable pensioners, its impact could be significant for middle- and high-income households. More broadly, this development underlines the major challenge of diversifying retirement income, and the key role that employers must play in supporting their employees in this transition.

FAQ: frequently asked questions about tax relief

What is the retired tax allowance?

This is a tax benefit of 10% applied to declared retirement pensions. It reduces the tax base of pensioners.

Who will be most affected by the abolition of the tax allowance?

Taxable retirees, especially those declaring annual income of €25,000 or more. The tax surplus varies according to income level.

Will the pensioners' tax allowance be abolished in 2025?

No. It will be maintained in 2025, but could disappear in 2026 under the Finance Bill.

Who benefits from the 10% lump-sum allowance?

This deduction applies automatically to all senior citizens, regardless of age or income. It applies to basic, disability, alimony and supplementary pensions.