Pension tax?

lhd4

Do you pay tax on your pension?

Paul_Herring

In short, yes, it's treated as income in the same way as wages are.

However your personal allowance increases at (currently) 65 and 75[1], so the amount you pay tax on at these ages decreases.

National Insurance, however, ceases to be paid at state retirement age (currently) 65 for men, 60 for women [2]

[1] http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015583
[2] http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015904

lhd4

Thanks paul for your response and links.

EdInvestor

Note also that the state pensions form part of your taxable income even though they are paid gross.

Old age tax free allowance from 65 is currently around 9k, going up to 10k.

cyclonebri1

Paul_Herring wrote: »

In short, yes, it's treated as income in the same way as wages are.

However your personal allowance increases at (currently) 65 and 75[1], so the amount you pay tax on at these ages decreases.

National Insurance, however, ceases to be paid at state retirement age (currently) 65 for men, 60 for women [2]

[1] http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015583
[2] http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015904

Or before if you retire early?

Pobby

EdInvestor wrote: »

Note also that the state pensions form part of your taxable income even though they are paid gross.

Old age tax free allowance from 65 is currently around 9k, going up to 10k.

Thanks Ed. In our case we hope to have a decent amount in savings. Buying an annuity with our pension funds and then drawing down from savings. How would the interest be taxed on that? I think that the state plus private pensions will be a tad under 10k each.

Also I hear that distribution bonds are a pretty low risk investment for income with certain tax breaks.

dunstonh

Also I hear that distribution bonds are a pretty low risk investment for income with certain tax breaks.

They range from low risk to high risk. Distribution funds, like many sectors, does not indicate one risk level. Not many distribution bonds exist nowadays. Modern versions are investment bonds with a large fund range which could include distribution funds but also other funds or lower and higher risk and the ability to switch. The right investment bond at the right price and heavily invested in fixed interest can be tax efficient and low cost in the right circumstances.

EdInvestor

Pobby wrote: »

Thanks Ed. In our case we hope to have a decent amount in savings. Buying an annuity with our pension funds and then drawing down from savings. How would the interest be taxed on that? I think that the state plus private pensions will be a tad under 10k each.

This is sounds pretty optimal for the basics .What sort of level of savings are you talking about and what type of risk levels would you be looking at?

Investment bonds pay "tax free income" of up to 5% p.a., but the reason it's tax free is because the withdrawals are not from the interest/dividends/earnings of the investments within, but from your capital. The earnings within the bond are taxed at 20%. Withdrawals from capital increase risk of losses during market downturns.

You would be better to hold the money directly in a mix of savings accounts and unit trusts, utilising your ISAs (both cash and stocks and shares, the latter also covers lower risk investments like bonds) every year until the money is all inside and all income from it is tax free.

As it is, equity (share) investments outside the ISA will attract no tax as dividends are effectively tax free for basic rate taxpayers and the annual CGT allowance is over 9k, if you need to cash in some shares/funds to top up income.

For extra cash which doesn't need to generate regular income, NS&I index linked certificates pay inflation plus 1% and are tax free.

dunstonh

The earnings within the bond are taxed at 20%

That is incorrect. Ed. Please learn about investment bond taxation. Its not as if this subject hasnt come up many times before.

You would be better to hold the money directly in a mix of savings accounts and unit trusts, utilising your ISAs (both cash and stocks and shares, the latter also covers lower risk investments like bonds) every year until the money is all inside and all income from it is tax free.

Which could actually be less tax efficient and more expensive. There are pros and cons to both ways.

EdInvestor

dunstonh wrote: »

That is incorrect. Ed. Please learn about investment bond taxation. Its not as if this subject hasnt come up many times before.

From the Pru:

Tax on investment bond


Note that at the start the company states it pays tax on capital gains and income within the bond and this tax is not reclaimable. Note also that as the capital gains tax rate is now 18%, lower than the lifeco corporation tax on investment bonds of 20%, it will be better for higher rate taxpayers to hold growth shares directly rather than in the bond.Basic rate taxpayers pay no tax on dividends, so they should hold all shares out side the bond.

Warning: the further details about chargeable events may make your brain hurt.It's never a good idea to invest in something you don't understand.



.

dunstonh

Correct. It pays tax on gains. Now tell us about the tax on income from both fixed interest and equties and how that itsnt 20%

it will be better for higher rate taxpayers to hold growth shares directly rather than in the bond.

Quite possibly nowadays. How about fixed higher yielding funds?

Warning: the further details about chargeable events may make your brain hurt.It's never a good idea to invest in something you don't understand.

Despite the ability of top slicing relief to save tens of thousands of pounds very easily. Most people dont understand how cars work but they still drive them. Most people dont understand investments but still invest. Your reasoning is flawed as is your understanding of this product. The actual calculation is quite simple.