Pensioners have been dealt a painful blow in the new chancellor’s first announcement.
Winter fuel payments are being cut for anyone not getting pension credit or certain other benefits. So, a lot of pensioners will be missing out on up to £300. You can check if you’re still eligible on the government website.
But that’s a drop in the ocean compared to the impact of frozen tax thresholds. Over 8.5 million tax-paying pensioners will be £960 worse off on average by 2028/29 because of the freeze.
To cancel out the impact of the benefit cut, it’s important to make sure your retirement income is as tax efficient as possible. And if you’re a pensioner and worried about heating this winter, check your eligibility for pension credit and other benefits on the government website.
Here are five ways to generate tax-efficient income in retirement.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for advice. Product and tax rules can change, and benefits depend on your circumstances. Investments and any income they produce can rise as well as fall in value, so you could get back less than you invest.
Maximise tax-free interest from savings
Basic-rate taxpayers can get up to £1,000 in interest from savings accounts each year without paying tax. If you pay higher-rate tax, it’s up to £500.
If your income is under the personal allowance, you also have the full starting rate for savings. So, the first £5,000 of interest on your savings is tax-free.
You get the personal savings allowance on top of that. It means you can make £12,570 from your pension and £6,000 in savings interest, without paying tax.
For every £1 of non-savings income over your personal allowance, you lose £1 of your starting rate for savings. That means if you earn £17,570, you don’t get the starting rate for savings at all.
The personal savings allowance is calculated using rest of the UK, not Scottish, income tax bands
When you’re retired, it makes sense to have emergency savings to cover one to three years’ worth of essential spending. So, with savings rates as high as 5% at the moment, it probably won’t take long for you to start paying tax on your savings.
It's worth thinking about a Cash ISA for your savings.
You can put up to £20,000 in a Cash ISA in the current tax year as part of your overall ISA allowance and any interest is completely free of UK income tax. And you can use your ISA allowance every tax year.
Take income from investments in an ISA
You can get bond or dividend income free of UK income tax – or cash in your investment and take it out without paying capital gains tax.
This can be a good way of boosting your income without having to worry about going over a tax threshold. You can move existing investments into a Stocks & Shares ISA through share exchange (also known as Bed and ISA), and shelter up to £20,000 in the current tax year.
Couples can share assets to double their tax-free allowances
Married couples or civil partners can use the marriage allowance to ease some tax liability on pension payments.
If one spouse's income is below the personal allowance (non-taxpayer) while the other has an income of less than £50,270 (basic-rate taxpayer), the marriage allowance can be a big help. The non-taxpayer can give £1,260 of their personal allowance to their spouse in the current tax year.
For example, let's say you have an income of £10,000 and your spouse has an income of £30,000. Their taxable income would be £17,430 (as the first £12,570 is tax free).
As the non-taxpayer, you claim marriage allowance and you can transfer £1,260 of your personal allowance to your spouse. Your personal allowance becomes £11,310 and your spouse gets a 'tax credit' on £1,260 of their taxable income.
Use allowances that help generate extra income
These include things like the rent-a-room scheme. If you rent a furnished room of your home to a lodger, the first £7,500 of rent each year is tax-free.
Similarly, you could consider a money-making hobby or a side hustle, like crafting or gardening. And the trading allowance means you can make up to £1,000 tax free.
You can also make another £1,000 from your property tax free, which means you could, for example, rent out storage space or a driveway.
Long-term care and purchased life annuities pay a tax-free income
One of the most tax-efficient ways to help pay for long-term care is to use a long-term care annuity, also known as an immediate needs annuity. The income is tax free if paid direct to the care provider.
Purchased life annuities are designed to provide a guaranteed income for life or over a fixed term, in exchange for a lump sum.
Part of the income paid is deemed to be a return of your original investment, so is tax free.
The interest element of the income is taxable, but you won’t pay any tax if it falls within the personal allowance or personal savings allowance.
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