Think you’ll stop paying tax when you retire? Think again.
In fact, the average tax bill for pensioners is £3,500 a year, according to HMRC data uncovered by Royal London and shared with Mirror Money.
That’s because, job or no job, pensioners are still taxed on any money they have coming in - whether it’s from pensions, property, hobbies, savings or part-time work.
“Many people might assume that once you retire you cease to be of interest to the taxman," said Sir Steve Webb, director of policy at Royal London.
"But these figures show that this is very far from being the truth. The number of taxpaying pensioners has nearly doubled in the last two decades."
HMRC figures show £24billion in income tax was raised from people of pension age in 2015-16 alone, with money coming from people working later, earnings from property and other investments, and pensions.
Men had an average income tax bill of £4,341, while women of retirement age had an average tax bill of £2,467, Royal London calculated.
How do I know how much tax I’ll pay?
How much money a pensioner owes the taxman depends on how much they ‘earn’ in the year.
When you retire, these ‘earnings’ are made up from several different sources including your state pension, any ongoing employment you may have, income from investments including buy-to-let property, and any money you take out of your pensions savings (either as an annuity or in drawdown).
Just like with income tax, you get a personal tax-free allowance which is announced each year by the Government and usually rises in line with inflation or average earnings. For 2018/19 it’s £11,850.
Any money you get over that threshold will be subject to tax, and income will fall into one of three bands, basic rate, higher rate and additional rate.
"When planning for retirement it is vital to remember that the tax office will still want a slice of your income, which reinforces the need to put aside enough to secure a decent standard of living, even after the tax man has had his slice,” Webb said.
So it’s just like getting taxed at work, that seems straightforward, right?
Sadly, pensions are more complicated. For instance, if your total pensions savings are higher than what’s called the Lifetime Allowance (£1,030,0000), you will have a lower personal allowance.
And how you choose to balance pensions savings (where you can either take 25% tax free up front, or invest in something called drawdown and get 25% of each withdrawal free), with ISA savings, which are tax-free and don’t count towards your total income, your state pension and any jobs you have, can massively change how much tax you pay.
And that's before we start talking about how many pensions you have and what happens when you're in a couple.
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Sounds complicated, what do I need to do?
There’s nothing you can do to get out of paying tax in retirement entirely, in fact, you should be wary of anyone who says they can help you avoid tax.
However, there are some simple mistakes you could be making, which mean you’re paying more than you need to. Here’s some of the common pitfalls and how to avoid them.
Make sure you’re getting your full allowances
There are various allowances that can increase the amount of money you can receive before you pay tax.
These include the married couples allowance (if at least one spouse was born before 6 April 1935), the marriage allowance (available for married couples and civil partners not eligible for MCA) and a Blind Persons Allowance.
In fact, if you are working and your partner isn't, you can even transfer some of your allowance to them, meaning less tax overall.
Check what you’re eligible for and make sure you claim it.
Don’t draw money you don’t need
The new pensions freedoms mean you have lots more flexibility about how you take your pension. However, you should make sure you only draw money you need.
Some people worry about their money and decide to try and take all of their pension at once, for instance to put it in the bank, clear their debts or to help buy a property to rent out.
But this is to be avoided if possible.
That's because the money you take out of a pension counts as income all in the same year.
You could end up pushing yourself into the higher rate band and losing 40% of of your hard-saved pension to the taxman in a single stroke.
If you're worried about your pension losing money, or think you could make more from it yourself, you can move it to a self-invested pension (SIPP) and decide where to put it yourself - or even hold it in cash.
Additionally, pensions freedoms mean you can take what you want, when you want; so your money will still be there for you later - building up interest tax-free.
That means the most sensible plan to beat tax is almost always to leave your savings in a pension for as long as possible and only draw the money you need.
Consider deferring your state pension
If you’re planning to work for longer, it may be worth deferring your state pension.
Otherwise, the money you receive from the state will be added to your earnings and could push you up a tax band.
If you’re dialling down and only working part-time, you may want to start taking your state pension, but only use it if you really need it.
Deferring it means it will be worth more when you do take it, and you’ll pay less tax now.
By deferring for one year, you’ll get an extra £493 every single year after that based on current figures.
Consider all your assets
If you have savings in ISAs you may want to consider how these will factor into your income in retirement.
Because ISA savings can be withdrawn tax-free, they don’t count towards your personal allowance. Using these savings is often a great way to top up your income without paying more to HMRC.
Even better, because pension savings are treated differently to other assets when you die, it often makes sense to use other forms of savings first.
The rules around pensions and inheritance tax are complicated, so make sure you check to see who you’re allowed to leave pensions to and in what form. The Government has more info here.
Take financial guidance or even advice
You’re entitled to free pensions guidance from Pension Wise after the age of 50. You can do this over the phone, but face-to-face sessions are also available.
This great service will walk you through all the options available and can make you aware of the tax implications of some decisions (such as taking all your money in one go).
But they don't tell you what you should do, merely explain your options. So if you want a more detailed look at plans and products - consider taking financial advice.
An independent financial adviser can look at the whole of your situation and talk you through the best strategy for you.
They can also help recommend the right products and providers and create a strategy based on your income needs to make sure you’re not paying too much tax.
Oh, and you can pay for that advice tax-free too. Government rules let you draw up to £500 of your pension - tax free - to cover the cost of getting advice about it.
