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Tax after Retirement Fact Sheet

Introduction

People over the age of 65 receive a basic personal allowance of £6,035 (in the 2008-2009 tax year).

In addition, they receive an age-related allowance.

For the tax year 2008-2009, this is:

• Ages 65 to 74 get £2,995 on top of the basic £6,035, taking them to £9,030 before they start paying income tax

• Ages 74 and over get £3,145, taking them to £9,180

Clawback

You only get the full age allowance if your income is below a threshold, set at £21,800 for 2008-09. Over that limit, you lose the extra age allowance at a rate of £1 for every £2 of additional income.

National Insurance

If you continue to be employed, you will not pay National Insurance contributions. Income from your pension is not subject to NICs either.

Ways round the tax system

The main ones are either to use Individual Savings Accounts, on which no income tax is payable, or to use with-profits bonds, from which the income is not taxed as it is classed by the Inland Revenue as a “return of capital”.

How to use with-profits bonds

• Under their so-called “five per cent rule”, investors who are higher-rate taxpayers can make regular withdrawals of up to that amount per year from their bond for 20 years, without being immediately liable to tax

• Income from the bond is classed as being a “return of capital” by the HM Revenue & Customs

• Tax is levied on the underlying with-profits fund by HMRC and cannot be reclaimed. This makes with-profits bonds unsuitable – from a fiscal perspective at least – for non-taxpayers

• If you do not use the 5 per cent withdrawal option in one year, you can take up to the previously forgone limit in subsequent years or any other variant as long as the overall ceiling is not breached

• More significantly, this income is not added to an investor's other income for tax purposes, benefiting elderly taxpayers in particular


More pages

Page 1: Introduction
Page 2: Top-slicing

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