Pensioners are still paying massive amounts of tax to the Treasury it has been revealed – and it’s still rising.
The government takes, on average, an incredible 30% of pensioner incomes – despite the fact that the vast majority no longer work. Just because you don’t have a job doesn’t mean you stop paying tax. This equates to an average of £7,400 every year.
The Office of National Statistics (ONS) has published a report claiming that the tax income from retired households for the years 2015-16 amounted to £52.7b.
This figure includes income tax and council tax, which accounts for £3,050 , plus VAT, vehicle excise duty and insurance premium tax which add up to a further £4,350.
However, it’s not all gloom and doom. If you include pensions, both private and state, various other benefits and any additional earnings, the average income per household came to slightly over £25,000.
The total tax paid into the chancellor’s coffers by pensioners was 4% lower than the 34% paid by the average working household.
Stan Roberts, an independent retirement income expert, said: “No longer working doesn’t necessarily mean you’ll no longer be paying taxes.”
“Many retired people will still have to consider that they will be subject to income tax as well as indirect taxation, such as VAT, that they will continue to face when they give up work.”
“We have seen incomes for newly retired pensioners rise in recent years. For many that means they continue to pay tax bills well into retirement.”
“People planning to give up work completely should make sure they don’t underestimate the tax they will have to pay on their income in retirement.”
Many people tend to forget their tax liabilities when calculating their retirement income, and it can come a quite a shock.
Molly and Geoff Steadman both retired over five years ago and are the first to admit that they ‘didn’t do their sums’.
“Neither of us looked into things properly. We both worked hard all our lives and paid in what we were told to pay in. We never even gave tax a second thought. So, when we found that our pensions were being taxed, it came as quite a shock.
‘Me and Geoff aren’t what you would call “financial people”, we just thought that ‘if you look after the pennies the pounds will look after themselves’, but it seems that hasn’t quite worked out.”
” I bet we’re not the only ones though; there must be millions of pensioners in the same boat.”
Another trap that some pensioners fall into is when they take lump sums out of their pension pots.
Under the new ‘pension freedoms’, people can take 25% of their pension pot free of tax, but the other 75% is taxable if you withdraw it.
Taking advantage of this scheme can be a great move and allows you to spend some of your hard-earned cash when you need it, but beware of taking out too much. Not only may you be liable to tax but you may leave your fund short to give you sufficient income in the rest of your retirement.
Remember, you have, no doubt, worked long and hard to save up for an easy life in your later years – make sure your cash works hard for you, and you don’t end up gifting it to the taxman.
Handling your pension income well is not easy, and you don’t want to pay a penny more tax than you need.
You need to get the timing right if you want to withdraw cash from your pension, so that you don’t take out too much in a single financial year.
So, always seek advice from a qualified and registered Independent Financial Adviser before making any decisions or, in the first instance and to find out more information, go to www.pensionwise.gov.uk or call 0800 138 3944.