Many pensioners are unaware that they will still pay tax when they retire but no longer working doesn’t mean you’ll no longer be paying taxes, in fact pensioners pay out almost a third of their income in tax – handing over an average of £7,400 each a 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 research 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.
And, while pensioners’ tax bills have risen, Prudential’s research has revealed that they in fact paid a slightly lower proportion of their income in taxes than those who were still working.
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 work.
But people need to understand the tax implications, especially when taking out lump sums from savings pots under the new pension freedoms.
Only 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. Beware, as tax is taken at source and you may pay this at a higher rate and will then have to claim it back.
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.
With so much uncertainty, it is vital to review your pension regularly to ensure that it achieves the income you require for your retirement. An independent financial adviser is best placed to provide unbiased, sound financial advice.
For more information contact Ben Morris on 01745 798260 or email: ben@morrisfinancial.co.uk
