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How pensioners can avoid tax
How Pensioners Can Avoid Tax on Their Pensions

It is a well-known fact that many pensioners, both men and women, struggle to live on the relatively low income they receive in retirement from their pensions when they are no longer working. While, as a pensioner, you should be prepared to pay all taxes that are legally required of you, it is acceptable to arrange your finances in such a way as to minimise or avoid your tax payments. Here's how pensioners can avoid tax.

In recent years, the average income of a pensioner is approximately £15,000. This is scandalously reduced to approximately £11,000 as the taxman takes about 28% of a typical pensioner's average income. This effectively works out at a shocking £80,000 if you consider that the average retirement existence is around 18 years for typical pensioners.

The main types of taxes that typical pensioners are required to pay include:

  • income tax

  • council tax

  • other indirect taxes such as VAT

How Pensioners Can Avoid Tax

Here are some strategies you can use if you are a pensioner wishing to reduce or avoid your tax payments:

1. Combine your income.

When considering how pensioners can avoid tax on pensions, pensioners who are married or couples in a registered civil partnership can combine their total income in order to take full advantage of their annual tax allowances.

Be aware that if you are an older saver, you will benefit from a higher level of personal allowances. For example, if you are aged between 65 to 74 years, your personal allowance sits at around £7,550 of income tax-free per year. If you are aged over 75 years, your personal allowance rises to around £7,690 of income tax-free per year.

A great way of how pensioners can avoid tax on pensions is to be smart with combining income, so when one spouse or partner has an income below the personal allowance, you should transfer savings that will pay an income into his/her name. Be aware that, as soon as your income touches £20,900, the enhanced personal allowance is reached.

2. Make investments.

A good tactic of how pensioners can avoid tax is to transfer as much savings as possible into untaxed investments. Here are some examples:

  • ISAs – these savings allow pensioners to save up to £3,000 cash a year tax-free.

  • Equities or Bonds – these savings allows pensioners to move up to £7,000 per year into ISAs.

  • Premium Bonds – these savings allow pensioners to invest up to £30,000 into the government-backed bonds, with prizes free from tax. It is calculated that a premium bonds saver with average luck should win prizes comparable to a return of 3.6% per annum.

  • Venture Capital Trusts – these savings are more daring as they are high-risk investments for pensioners. Generally, most of your money is used by venture capitalists to support new businesses. When figuring out how pensioners can avoid tax, you should know that the downside is that, once you make this investment, your shares must be left untouched for at least five years. However, the key benefit is that you can enjoy a 30% up-front income tax rebate. Additionally, any of the returns you enjoy are paid out in the form of dividends, which are also tax-free.

3. Maximise your annual capital gains tax allowance.

Another way of how pensioners can avoid tax is to cash in a small portion of shares and investments to provide additional income. This way, pensioners can crystallise gains of £9,200 a year without having to pay any tax.

Remember that, when managing your retirement income and thinking about how pensioners can avoid tax, it may not always be the best thing to have too much income. The ideal position to be is to achieve a balance where you, as a pensioner, has a comfortable amount to live on, but not have too much in pensions sitting in your bank account waiting for the taxmen to get his hands on it!

Learn more about pensions 

 

 
 
 
 
 
 
 
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