When you’re planning your retirement income, there are multiple factors to consider: how much you can expect from the State Pension, the value of the pensions you have accumulated in your working life, your projected outgoings and your potential later life expenses.
One more factor not to overlook is how much of your retirement income you could lose in taxes. The amount you pay to HM Revenue & Customs (HMRC) may be more than you expect, leaving you with less to cover your regular expenditure.
New data highlights that retired households lose nearly 14% of their income a year to direct taxes. Income tax and council tax take 13.9% off the average retired household’s pre-tax income of £31,674. Retirees are also impacted by around £4,078 a year in direct taxes.
Once you retire, you’ll no longer need to pay certain taxes, such as National Insurance. But other taxes are still applicable, including Income Tax. You’ll pay Income Tax on any taxable income you receive above your personal allowance (currently £12,570, tax year 2021/22). Taxable income includes your State Pension (currently up to £9,339 if State Pension age is after 5 April 2016), income is withdrawn from your workplace or personal pensions, and income from other sources, such as part-time work or rental income from buy-to-let properties. There are also other taxes you might not have factored into your budget, such as Council Tax.
If you have different sources of income, you may end up with several tax codes, which tell your employer or pension provider how much tax to deduct. Don’t assume these are correct – HMRC does make mistakes. You should receive coding notices with details of your tax codes before the start of the tax year. It’s a good idea to check these are right and if you think there’s a mistake, or if you’re not sure, contact HMRC.
The first time you take a lump sum (apart from the tax-free lump sum) from a defined contribution pension scheme, it’s likely you’ll be charged too much tax. This is because most initial lump sum payments are taxed using an emergency tax code. This means you’re taxed as if you made the same lump sum withdrawal every month of the tax year. You can claim back overpaid tax.
The way your savings are taxed doesn’t change when you retire or reach State Pension age. Banks and building societies now pay savings interest without any tax taken off but, depending on your situation, you may still have to pay tax on some of your savings income.
An effective tax plan is a crucial part of planning for retirement and can help you make the most of your financial resources. It’s always important to consider the amount of after-tax income you’ll earn. Remember: ‘It’s not what you earn, it’s what you keep.’
Before you retire, there are various ways to boost your retirement income in the future. You may be able to increase the State Pension you’re entitled to claim by filling any gaps in your National Insurance contributions record. If you haven’t taken advantage of them, you may have tax-efficient savings options, such as Individual Savings Accounts (ISAs). Within an ISA you pay no UK tax on income or capital gains. Paying less tax could mean higher returns for you (and less work if you need to complete a tax return).
And you can also plan the most tax-efficient way to access your pension from age 55 (57 from 2028 unless your plan has a protected pension age). Taking money from your pension plan is a big decision, and when and how you do it can have significant impact on how long your savings will last. So, when the time comes, it’s important you feel confident you understand your options and how your decisions might affect the tax you pay and how long your money will last.
Defining your retirement goals and what you think you’ll require in terms of income can help shape your plan and how much you will need. To discuss your requirements, please contact us – we look forward to hearing from you.
A pension is a long-term investment not normally accessible until age 55 (57 from april 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.
Your message (optional)
Lawsons Equity Limited is a company registered in Malta with company number C49564 and Licenced by the Malta Financial Services Authority as Enrolled Insurance Brokers under the Insurance Intermediaries Act 2006, and to provide Investment Services under the Investment Services Act, 1994. Lawsons Equity Ltd have passported their services across the EU. To see a full list of countries click here
In the United Kingdom, Lawsons Equity Limited is deemed authorised and regulated by the Financial Conduct Authority. Details of the Financial Services Contracts Regime, which allows EEA-based firms to operate in the UK for a limited period to carry on activities which are necessary for the performance of pre-existing contracts, are available on the Financial Conduct Authority’s website.
Copyright 2020 Lawsons Equity Ltd | Designed by Echo
Disclaimer: The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning investments or investment decisions, or tax or legal advice. Similarly, any views or options expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Lawsons Equity Limited has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Lawsons Equity Limited does not accept liability for losses suffered by persons as a result of information, views of opinions appearing on this website. This website is owned and operated by Lawsons Equity Limited.