Is there any taxable retirement income? Tax laws for pensions and savings are discussed.
IF YOU WANT TO KNOW IF YOUR RETIRED INCOME IS TAXABLE, THE QUICK ANSWER IS YES.
Because money received from pensions is classified as income, it is taxed in the same way as normal income.
When people reach the age of state pension, which is now 66, they stop paying National Insurance.
This means that if persons are able to retire early (before the age of 66), they will be required to pay National Insurance if they meet the standard criteria.
National Insurance is paid at a rate of 12% on earnings between £797 and £4,189 per month, and 2% on earnings exceeding £4,189 per month.
When converted to yearly earnings, this means that National Insurance will be paid at a rate of 12% on a salary between £9,564 and £50,268.
Over this amount, it will be paid at a rate of 2%.
Income tax will be levied at the same rate for everyone, regardless of age.
Income tax is designed in a progressive manner, meaning that the higher one’s income, the higher the percentage they must pay.
People presently have a £12,570 personal allowance, after which they pay no tax.
After that, persons who earn up to £50,000 are subject to a 20% tax.
The higher rate comes in at this stage, and people are subjected to a 40% tax rate.
It’s also worth noting that state pension income is treated as regular income, even though the current yearly income from a full state pension is roughly £9,340, which is below the tax-free threshold.
This means that if a person’s only source of income is the state pension, they will not be subject to taxes; however, if other pension income exceeds the thresholds, they will be.
However, it is not all doom and gloom, as there are techniques that people may use to keep the taxman out of their money.
If you have a Defined Contribution plan, like most people, you will be able to withdraw a quarter of your pension assets as a tax-free lump payment.
Some pension plans even include rules that allow members to take a tax-free lump payment of more than a fourth of their pension assets.
In some extreme circumstances, persons may be allowed to withdraw their entire pension as a tax-free lump payment.
This will be the situation if they are under the age of 75 and are anticipated to live less than a year due to severe.