The state pension
Thirteen million people get a state retirement pension. And it will rise in two parts from the week of April 6.
The basic state pension will increase by 2.5%. That puts the full standard basic state pension up by £2.85 from £113.10 to £115.95 a week.
Some people get a reduced smaller state pension because they have an incomplete National Insurance contribution record. Over 1.5 million married women who rely on their husband’s contributions currently get £67.80 a week and that will rise £1.70 to £69.50.
This basic state pension – called Category A or B – rises in line with what is called the ‘triple lock’ guarantee. That increases the pension each year in line with earnings, prices, or 2.5% whichever of the three is the biggest. This year earnings rose less than 1% and prices by 1.2% so the basic pension goes up by 2.5%.
Are you one of the women disadvantaged by the state pension changes?
In addition to the basic pension, most pensioners get some extra amounts on top. They include the State Earnings Related Pension Scheme (SERPS), State Second Pension (S2P), Graduated Retirement Benefit (GRB), and extra pension for putting off claiming their pension when they reach state pension age. All these extra amounts will rise by 1.2%, which is the annual increase in the cost of living as measured by the Consumer Prices Index at September 2014.
This two part rise means it may be difficult for Her Majesty's Revenue & Customs to estimate how much pension an individual will get. That could mean tax codes for 2015-16 are wrong if HMRC cannot get individual information from the Department for Work and Pensions.
What benefits are you entitled to after you retire?
Around one and a half million of the 2.5 million pensioners who get pension credit will get a rise of pence rather than pounds in their weekly state pension money. Most will get just 87p a week – or 60p each if they are in a couple.
Pension credit is a weekly top-up for pension age people. In 2015-16 it boosts their income to at least £151.20 a week (£230.85 for a couple). If they are 65 or more, they can get an extra amount called savings credit if their weekly income is less than £188 (single) or £274 (couple). But this savings credit is being cut. And that means the 1.6 million people who get it will find that most of the rise in their state pension will be taken back by the cut in savings credit.
How to apply for pension credit.
A practical example
For example, Mary is 68. She worked all her life and gets a full state pension of £113.10. She also gets another £40 a week from an annuity she bought with a small pension pot she paid into. So this year her weekly income is £153.10. That is topped up by £14.90 savings credit, making a total of £168.00 a week. From April her basic state pension will rise by £2.85 to £115.95. Her annuity will remain at £40. And her savings credit will be cut by £1.98 to just £12.82. So her total income will be £168.87. It’s an increase of 87p and a rise in her state pensions of just 0.6%.
Mary’s experience is typical. The basic state pension will rise by £2.85 but the savings credit will be cut by £1.98, leaving a net gain of 87p a week. For couples the net gain will typically be £1.20 – just 60p each, which won’t leave much change from a pint of milk.
This cut does not affect the one million people on pension credit whose income before they receive it is less than £120 a week (£192 for a couple). They will see their income rise by £2.85 from £148.35 to £151.20 a week (a rise of £4.35 for a couple to £230.85 a week). But it does affect those with incomes before their pension credit between £120 and £190 a week in 2014-15 (between £192 and £278 for couples). They will get a rise of pence rather than pounds. The Government says it is concentrating its resources on the poorest.
Most people who pay tax will be paying less in 2015-16 than they did in 2014-15. The personal allowance – where income tax begins to be paid – will rise to £10,500 in the year. That means that even those born April 6, 1938 to April 5, 1948 – whose allowance had been frozen at £10,500 since April 2012 – will see a rise in 2015/16.
However, the older group born before 6 April 1938 will still not see any increase as their age allowance is £10,660 where it has been since 2012. People with incomes over about £28,000 don’t get the age allowance and will, of course, get the same increase in their personal allowance as younger people.
People who have savings income of up to £5,000 may pay less tax. A new 0% rate applies to savings income that is in the first £5,000 of income above the personal allowance.
Will you still get taxed when you retire?
What about savings income?
Savings income is counted as if it floats on top of other income. So if you have pensions and non-savings income totalling £10,500 that uses up all your personal allowance and then any savings interest is tax-free up to another £5,000. But if you have other income of £15,500 or more, then any savings interest on top of that is not in the 0% savings band and will be taxed at 20% or, if your income is high enough, at 40%.
If your income is no more than £15,500 then you will be able to register to have your savings interest paid gross using form R85. If it is more than that, then any savings interest will still have tax deducted automatically and it will have to be reclaimed using a form called R40. You can get the forms from HMRC or your bank or building society may have the R85.
The higher rate tax of 40% will begin at slightly higher incomes in 2015-16. In 2014-15 it began when taxable income exceeded £41,865. That will rise to £42,385 in 2015-16. Child Benefit will continue to be taken away by a tax charge where the higher-paid partner in the household has an income over £50,000 and the tax charge will equal the child benefit when income exceeds £60,000.
From April, married individuals and civil partners will have some freedom to move up to £1,060 of their personal tax allowance to their spouse or civil partner. That can save up to £212 in the tax year if one spouse is a taxpayer and the other is not. The person receiving the extra allowance must not be a higher rate taxpayer. Details of how to claim should be on the gov.uk website before April.
The concession only applies to couples where both were born on April 6, 1935 or later. If either was born before that date, then one of them can claim a married couple’s allowance which can save up to £835.50 tax. It can be shared between them.
If you need help navigating through pensions and savings, Saga offers a financial planning service to ensure your savings and investments are working hard to achieve your financial objectives.
The 87p rise: visit paullewismoney.blogspot.co.uk, search for ‘pension rise’.
Tax: visit gov.uk and search ‘tax thresholds 2015/16’ or ‘R40’ or ‘R85’ or ‘transferable tax allowance’.