When you retire, your financial circumstances will change, but so too will the amount of tax you pay and the benefits you are owed. If you are approaching retirement or are planning ahead for your future, here's what you need to know.
Income tax and National Insurance
Even retired folk are required to pay income tax and that includes all pension income. However, you may be eligible to pay a lower rate of income tax. Currently every UK citizen is entitled to earn £10,000 (for the 2014-15 tax year) without paying income tax. This personal allowance may be higher if you were born before 6 April 1948, though it depends on your income. For instance, if your annual income is £27,000 or below, including income received from any pensions or savings, your tax allowance would be between £10,500 and £10,660. With an income of between £27,000 and £100,000 you would lose £1 in age-related personal tax-free allowance for every £2 you earned, though the tax-free amount would never fall below the £10,000 standard. If your earnings are over £100,000 though, you may find your personal allowance is lost.
When it comes to National Insurance, you are currently required to have made 30 years' worth of contributions in order to claim the full basic state pension. From 6 April 2016, however, when the flat-rate state pension is introduced, you will need at least 35 qualifying years of National Insurance payments to receive the full pension. If you continue working beyond the state pension age, you will no longer be required to pay NI.
If your income falls below the tax-free personal allowance, you are not required to pay tax on your savings, which means you are entitled to all the interest on any nest eggs. Once again, contact HM Revenue & Customs to make sure you are getting the most from your savings by completing form R85, or claim back tax that you may have paid when your income was below the tax-free limit by filling out form R40.
Those on a low income in retirement may be able to claim pension credit. The amount you can claim will depend on your income, but even a small amount may mean you are eligible for other benefits such as housing benefit or reduced council tax payments so it is worth claiming. There are two types of pension credit - guarantee credit and savings credit. The former will top up your weekly income to a level of £148.35 if you are alone, or £226.50 for couples. Savings credit rewards those who have saved towards retirement by providing an additional weekly income of up to £16.80 for single people or £20.70 for couples. Disabled people or carers may be eligible for an higher payment.
There are many benefits available to pensioners in the UK, yet government figures reveal that as many as 1.6 million are missing out. For instance, you may be eligible for winter fuel payments or cold weather payments, depending on your income and any other benefits you are claiming, and insulation and heating schemes to improve the energy efficiency of your home may also help.
Pensioners are also eligible for a number of free or reduced payments in other areas. Those over 60 can get free prescriptions and eye tests, as well as help towards dental treatment, glasses and travel to hospital. The TV licence is free for over-75s, you may be entitled to a free bus pass depending on your age, and it is often the case that you can pay a reduced amount of council tax. To find out what you could claim, visit Gov.uk online and use the benefit calculator.
Are you aware of the tax and benefits you could receive in retirement? Do you think the government should do more to help people understand what they could be claiming? Leave your comments below...