plonkee money an english-er's thoughts on personal finance

July 16, 2007

baby boomer with no pension: tax and benefit implications

Filed under: retirement — plonkee @ 12:00 pm

The ‘baby boom’ took place between 1945 and about 1960 (approximately) and the boomers will be approaching retirement shortly. If you’re a boomer and you have no (or very little) pension in place, what should you be doing?

Having established what you are currently predicted to be entitled to, it is important to establish what additional help is available from the government and the level at which you are likely to be taxed.

The first and most important thing to those that have no or truly minimal pensions is the pension credit. This provides a guaranteed income for pensioners and currently stands at £119.25 per week (this is £6201 a year) for single people. As things stand, effectively no matter how low your income, you will not have to live on less than this. One of the important features of the pension credit is that it treats capital (savings, additional property, stocks etc) as deemed income – so for every £500 in savings above £6,000 you lose £1 per week of pension credit.

However, another feature of the pension credit for the over 65s is the savings credit – if you have income above the savings credit level (currently the full state pension of £84 per week) including deemed income then the guaranteed amount that you are entitled to is increased. The maximum increase that you can currently get is £19.05 for a single person (giving a total of £138.30) for which you need either £31.75 a week additional income (from another pension or job) or about £21,500 in capital. If your income is more than £119.25 for a single person, but less than £167 you could still benefit from pension credit.

The next major benefit is the increased tax-free allowance for pensioners. Everyone is entitled to a tax-free allowance (in 2007-08 this is £5225) but pensioners may get an age-related additional amount. If you are between 65 and 74 your tax-free allowance is £7550 and if you are 75 or over, your tax-free allowance is £7690, in both as long as your taxable income is below £20,900. For every £2 of taxable income above £20,900, your tax-free allowance drops by £1.

The third factor isn’t exactly a benefit, but if your income no longer comes from employment they it won’t be subject to National Insurance. This will affect how much gross income you need to sustain your preferred (or possible) lifestyle.

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