Dummies July 2005

Taxing Issues in Later Life

(an extract from Paying Less Tax 2005/2006.
Advertising Feature)

In This Extract
* Looking at retirement and beyond
* Taking tax advantage of pension benefits

• For more advice such as self assessment or how to reap age-related perks, read Paying Less Tax For Dummies 2005/6
 

No one owns up to being old. Euphemisms such as ‘senior citizen’ or ‘retired’ or even ‘post-work person’ abound. And the gap between older people and younger people in terms of culture, music and clothes is far narrower than it was a generation ago.

Realising when age does - and doesn’t -matter

People retire at all sorts of ages - or sometimes not at all. There’s a lot of choice, except as far as the Inland Revenue is concerned.
 

Currently, Inland Revenue starts giving age-related benefits at age 65 for men and 60 for women. And before you ask, this sex discrimination is legal. It will disappear over the coming years as the female state pension age moves upwards to 65. This affects women born between April 6 1950 and April 5 1955. All younger women have a state retirement age of 65.

Working on past retirement age

There’s nothing to stop you working past the state retirement age - and your wage packet may get fatter as a consequence. Once you reach State Pension age you no longer have to pay national insurance in any of its shapes and forms.

You have to ask the Inland Revenue for a ‘certificate of exemption’ to give to your employer. Your boss doesn’t gain on this deal: Your employer still has to pay national insurance for you until you quit working.

For employed people, the saving in tax year 2005-06 from not paying national insurance is worth 11p in each £1 earned between £94 and £630 a week. For any amount more than £610 a week, you save 1p in each £1.

If you carry on working for an employer either full or part time past your retirement age, the employer continues deducting tax under the PAYE system. But there’s nothing to stop you working for yourself, maybe cashing in on a craft interest such as dressmaking or gardening.

You have to do a self assessment tax return if you have spare-time earnings from self-employment after your state retirement age just as you would before your retirement. These earnings are added to your pension payments to produce an overall figure for taxation purposes.

One difference is that you won’t have to pay any national insurance on your self-employment earnings. The self-employed over state retirement age with self employment earnings topping £4,345 a year will save £2.10 a week because they will not have to pay the national insurance Class 2 payments applicable once you pass this earnings threshold.

And those past the state retirement age will not have to pay Class 4 national insurance either. So this will save a further eight per cent of their profits between £4,895 and £32,760 compared with someone aged under state retirement age. These rates apply to the 2005-06 tax year and are likely to change in future years.

Paying Attention to Your Pension

Your pension, whether from the state, an employer or an insurance company, counts as income. So it’s taxable.

Any occupational pension is adjusted to take care of what you receive from the state before arriving at a tax deduction figure. The pension payer, usually a firm you used to work for, adds your state pension to your occupational pension to get an overall sum. The pension payer then works out your tax on that. So if your state pension is £5,000 a year and your occupational pension is £8,000, your pension payer taxes you on £13,000, sending the tax via the PAYE system.

If you do not receive the full state pension, either because you fail to qualify in part or completely or because you have chosen to defer it so that you get a larger sum each month later on, check to ensure that you are not being taxed on amounts you are not receiving. You don’t want to pay tax on money you don't have!

Claiming your tax-free lump sum

Most work-related pensions, and all personal pensions, allow you to claim a lump sum paid to you out of the pension plan free of all taxes. Typically, a personal pension offers a 25 per cent tax-free lump sum.


The flipside of taking the lump sum is a lower pension because there is less left in your pension pot after the lump sum is taken out. But even if you want a higher pension every month, you should still take the lump sum. Why? Because you can use the tax-free lump sum to buy a tax-saving annuity.

Dummies Articles in this series

• Diabetes for Dummies

• Taxing Issues in your golden years

• Wine for Dummies

• Su Doku for Dummies

• Wills, Probate and Inheritance Tax for Dummies

• eBay.co.uk For Dummies

• Starting Your Own Business for Dummies

• Kakuro for Dummies

• Arthritis for Dummies

Other Dummies Books

Buying an annuity to save tax

Whether it’s from a former employer or from a personal pension, your income in retirement is taxed. But you can convert your tax-free lump sum (and any other savings you think fit) into an income for the rest of your life via an annuity.
An annuity is like life insurance in reverse. Instead of you paying premiums each month and your family receiving a big lump sum if you die, you pay over a lump sum and then receive a monthly income until you die. You obviously do better if you live for 20 to 30 years rather than 20 to 30 months. Table 6-1 sets out definitions of the annuity types.

Table 6-1 Types of Annuities and Their Benefits

How much less you pay depends on some really complicated calculations. But as a rule, purchased life annuities work better for people with short life expectancy. So the tax saving is greater the older you are at the start.

The arithmetic is complicated. Obviously, the higher the investment return, the more tax is due. But the older you are when you start a purchased annuity, the more comes back to you tax free. Men, who tend to live shorter lives than women, also do better because more of each purchased annuity is treated as a tax-free return of capital rather than a taxable investment gain.

(The above is an extract from Paying Less Tax 2005/2006.
Advertising Feature)

• For advice such as self assessment or how to reap age-related perks, read Paying Less Tax For Dummies 2005/6

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