Pensioner Savings Q and a

Ask the vast majority of savers exactly what it is that they are saving for and they'll answer with one word - retirement. Yet those people who are approaching pension age are given no real clue as to how their savings will be taxed. In this Q&A we answer some of the many questions that pensioners ask about their retirement savings.

Q. Do pensioners get taxed on their income, and if so, what is the taxable rate?

A. A single pensioner is entitled to receive up to an annual income of £9,030 of annual earnings within each tax year. However, for any income that they earn above that limit, they are expected to pay tax on the remainder of their earnings, at a rate of 20 percent, which is the basic rate for all UK taxpayers.

Of course, most people agree that the income threshold for pensioners is currently far too low. Especially when you take into account higher costs of living and the higher prices we are all expected to pay for gas and electricity.

Q. I am a pensioner and I am earning more than the £9,030 income limit. Do I get taxed at the higher rate?

A.Yes you do, although the tax credit system means that the rate you pay changes on a ‘tiered’ basis. For example, if you find that you are earning more than £21,800 you will be required to pay tax on this income at a rate of 30 percent. If you earnings are higher, and are at the level of £42,035 you will have to pay tax at the rate of 40 percent.

Q. I have a number of shares, from companies listed on the stock market. Will I still have to pay tax on the dividends I receive on my shares?

A. Unfortunately, yes. As you will know, most companies pay out dividends to their shareholders twice a year. Shares can provide a consistent level of return that is better than the interest earned on cash in savings accounts.

When you retire however, there is no change to their taxable status. You will still be required to pay tax of 10 percent on shares if you are a basic rate taxpayer, and if you are a higher rate taxpayer you will be expected to pay tax at 25 percent.

Q. What about standard savings accounts? Do they get taxed?

A. They do, and sometimes banks are reluctant to advertise this fact, so beware. Any interest that you earn on your savings will see you paying tax on this interest at a rate of 20 percent as a basic rate taxpayer, and 40 percent if you are a higher rate taxpayer.

Most bank accounts advertise their savings rates by quoting the ‘gross’ interest rate, which of course makes them sound more attractive than they originally are. For example, higher rate taxpayers will find it difficult to find a savings account that pays a ‘net’ rate of interest higher than 4.5 percent, which is around the same level as inflation.

Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.

Q. At least ISAs (Individual Savings Accounts) are tax-free, correct?

A. That is not strictly true. Any income you take out of an ISA is tax-free, but if you own a stocks and shares ISA the dividends that you can expect to earn from those shares within the ISA will be taxed.

Another drawback associated with ISAs is the cap on what you can pay in each year. For 2026/27 the overall allowance is £20,000 across all your ISAs. From 6 April 2027 the cash ISA allowance falls to £12,000 for anyone under 65, but savers aged 65 and over keep the full £20,000. Check GOV.UK for the current limits before you commit any money.

Q. Would I be better off forgetting my savings accounts and putting my money into Premium Bonds instead?

A. Premium Bond prizes are tax free, and you can hold more in bonds than you can pay into an ISA in a year: up to £50,000 per person, with a minimum purchase of £25. Bear in mind though that there is no guaranteed return. Your money earns nothing at all unless your bonds win.

NS&I publishes a prize fund rate, but that is an average across all bondholders rather than a rate anyone is paid. A few large prizes pull the average up, so most holders win less than it suggests and some win nothing in a year. The odds are currently 21,000 to 1 for each £1 bond in each monthly draw, and both the rate and the odds change from time to time, so check nsandi.com for the latest. Pensioners who need a dependable income from their savings tend to keep a slice of their money in bonds rather than the bulk of it.

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