Retirement is not freedom from tax
Traditional retirement may represent an escape, but for many there’s no escaping the “misery” of the annual tax return.
Tax is probably the last thing on the minds of those who are settling into a life of leisure, hobbies and time with the grandkids. Yet income growth for the over-65s has raised the prospect of more pensioners paying direct taxes.1
Generous income paid out from final salary pensions, combined with rises to the State Pension, has led to a substantial rise in the proportion of pensioners paying Income Tax. Analysis of HMRC data by Royal London reveals that in 1990/91, about one in nine taxpayers were pensioners, but today the ratio is one in five.2
Furthermore, pensioners with more complex financial arrangements are still required to complete self-assessment tax returns, even though, for many, it’s a daunting task. The analysis shows that around 1.7 million pensioners filed a tax return in 2015/16 – and 275,000 of these were 80 or over.
PAYE and display
Tax is usually deducted automatically from wages, pensions and savings, so most of those who rely solely on their pension in retirement are unlikely to need to file a tax return.
“In many cases where a pensioner is just receiving an annuity, final salary pension or income from drawdown, then there will be no need for a tax return: it will be dealt with under the PAYE processes, in the same way as a salaried individual’s income,” says Claire Trott, head of pensions strategy at Technical Connection.
However, people with other sources of income can fall into the self-assessment category if they fulfil at least one of HMRC’s criteria for filing a tax return. For instance, those who receive £2,500 or more per year from letting property will need to display it clearly on their tax return, as will many of those who receive dividend income of £5,000 per year or more. Likewise, individuals may need to report the sale of assets (such as shares) if taxable gains are above their allowance.3
“Even retirement does not mean freedom from the misery of the annual tax return,” says Steve Webb, a former minister of state for pensions who is now Royal London’s director of policy. “It is shocking that over a quarter of a million people aged over 80 are still being asked to deal with this paperwork each year.”
“HMRC should prioritise getting older pensioners out of the system. The idea you are over 80 and you still have to go through what we all find a bit of a nightmare is not good enough,” says Webb.
But as well as declaring income through self-assessment, elderly pensioners may have to reclaim tax that they have overpaid. For example, those who take a large, one-off cash lump sum from their pension for the first time might need to reclaim some of the tax paid on it. This is because HMRC assumes that the sum withdrawn will be repeated every month and applies an emergency tax code.
While many pensioners will be comfortable with managing their own financial affairs, not everyone feels confident about filing tax returns and reclaiming overpaid tax. Appointing an accountant or a financial adviser with tax expertise can help to minimise both the worry and the amount of tax payable.
And while cognitive impairment is not an inevitable part of getting old, the peace of mind that comes from appointing a lasting power of attorney* (to take care of finances should health deteriorate) could prove invaluable for some individuals.
If you are unsure on the criteria used for self-assessment, details can be found at www.gov.uk/self-assessment-tax-returns.
The level and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
*Powers of Attorney involve the referral to a service that is separate and distinct to those offered by St. James's Place and (for UK purposes) are not regulated by the Financial Conduct Authority.