Pensioners are still haunted by taxman
PENSIONERS are filling the taxman’s coffers with almost a third of their income – handing over an average of £7,400 each year.
The total bill for direct and indirect taxes for the UK’s retired households in the 2015-16 tax year was £52.7billion, according to analysis from Prudential of figures from the Office for National Statistics.
Direct taxes include income tax and council tax, costing an average £3,050, and indirect taxes include VAT, insurance premium tax and vehicle excise duty which cost an average £4,360.
Tax bills increased by around £400 per household in the year to April 2016, a £1.7bn boost to the Inland Revenue. Three-quarters of that increase was due to direct taxation at £300 more than its 2014-15 level.
But there was some good news as the average retired household income – including state pension, private pensions, benefits and other earnings – rose by around £1,200 to just over £25,000.
And while pensioners’ tax bills have risen, Prudential’s research has found they paid a slightly lower proportion of their income in taxes than those who were still working.
The total tax for pensioners was four percentage points lower than the 34% paid by the average working household. Stan Russell, a retirement income expert at Prudential, said: “No longer working doesn’t mean you’ll no longer be paying taxes.
“Many retired people will still need to consider income tax bills as well as all the other indirect taxation on expenditure that they will continue to face when they give up work.
“We have seen income expectation for new pensioners rise in recent years. For many that will mean they continue to face tax bills well into retirement.
“People planning to give up work should make sure they don’t underestimate the impact tax will have on their income in retirement.”
GET YOUR TAX SUMS RIGHT
Saving as much as possible throughout a working life can help people to plan ahead for a more comfortable retirement and give them more options as to when they can afford to give up the nine-to-five grind.
But people need to understand the tax implications, especially when taking out lump sums from savings pots under the new pension freedoms.
Just the first 25% of a pot is tax free, the other 75% is taxable and the rate that is charged depends on other income during the tax year you take cash.
Don’t rush in – take your time and ensure you get the timing right when taking cash to ensure you don’t give the taxman more than you need to.
It may be that waiting until the new tax year to dip into pension savings could save you thousands in tax, compared to releasing cash during a year when you are still earning.
Take advantage of your free Pension Wise session to get the basics on the pension freedoms and what options you have, and get advice from a pensions expert who can help you to get the timings right.
Remember, you have worked long and hard to save up a nest egg – make sure your cash works hard for you during retirement and you don’t end up gifting the taxman with a penny more than you need to.
Pensionwise.gov.uk or call 0800 138 3944. Find an independent adviser in your local area via unbiased.co.uk.