Retired households hand over £7,400 to the taxman
In further evidence that pensioners are seeing their incomes rise, those in retirement have seen their annual tax bill grow by 5.7% to an average £7,410 (2015-16 tax year)1.
Nearly 30% of pensioner household income was taken up with paying the taxman, and this figure includes income tax, council tax, VAT, insurance premium tax and vehicle excise duty in the 2015-16 tax year. This compares with 34% of average annual income paid by working households.
Pensioner incomes on the rise
Pensioners’ incomes have been steadily rising over the last few years. In a remarkable turnaround, more people in their 70s now earn enough to pay tax at the higher rate of 40% than those in their 30s. This can be due in some cases to generous final-salary pensions, as well as the comparatively higher wages and regular bonuses they were more likely to receive during their working lives than today’s workers. It can also be down to the financial acumen of the baby-boomer generation who managed their finances well, saved hard and paid off their mortgages as soon as they could.
Although many in their 70s are reaching the end of their working lives, and have often been collecting their state pension for several years, more than 11% of women in this age group still have a job, as do 15.5% of men.
Avoid the pension tax trap
Retired people can find themselves paying more income tax because of the new pension regulations, which allow them to access their defined contribution retirement savings from age 55. That’s why it’s important to take professional advice before accessing your pension pot. Please get in touch. Taking too much cash out in one go can mean that you end up paying high rates of tax, when with a little careful planning you could be paying less.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
1 Prudential, Jun 2017