Pensioner Savings Q & 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.
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 that the most you can put into an account each year is just £7,200. This limit really should be increased in order to make ISAs more cost-effective for pensioners and other savers.
Q. Would I be better off forgetting my savings accounts and putting my money into Premium Bonds instead?A. Premium Bonds are tax free and have a far higher limit that ISAs (you can invest up to £30,000 in Premium Bonds. Bear in mind though, that the rate of return from these Bonds is pretty poor.
The likelihood of your investment earning you £750 of winnings a year, which would be the same as earning 2.5 percent in a savings account, is fairly small at just 11 percent. Most pensioners therefore feel that the odds are not worth investing too large an amount in Premium Bonds.