Latest news with #retirees
The Sun
5 hours ago
- Business
- The Sun
How to legally avoid paying tax on your pension as millions hit with shock bills
MILLIONS of retirees have been hit with shock tax bills after their state pension payments increased. Around 904,000 people on the state pension are now paying income tax at 40%, according to data obtained from HM Revenue and Customs in a freedom of information request. Meanwhile, 124,000 retirees are now paying the tax at an eye-watering 45%. The new state pension rose to £11,973 a year in April, putting it within touching distance of the £12,570 income tax threshold. But some pensioners receive more than this amount each year because they delayed the date at which they started to claim the payments. Pensioners who get income from a private pension could also find themselves pushed over this threshold. Income tax thresholds are frozen until April 2028, which means that more people could find themselves dragged into higher tax bands through a concept called fiscal drag. The higher rate tax band is frozen at £50,270, which means any earnings over this amount are taxed at 40%. Meanwhile, the additional rate tax band is fixed at £125,140, beyond which any earnings are taxed at 45%. But there are things you can do to stop a surprise tax bill landing on your doorstep. Here we explain how you can avoid the tax trap. Time your tax free withdrawals You can withdraw up to 25% of your pension pot tax free when you first retire. How to track down lost pensions worth £1,000s However, you need to pay tax on any money you withdraw beyond this. Any money you withdraw is added to the other income you receive, which could push you into a higher tax bracket. One way to avoid this is to spread out your withdrawals over several years, suggests Andrew Oxlade, investment director at Fidelity International. He said: 'If you do take a portion of the 25% tax-free sum every year, that income, along with income from Isas and your state pension, could be enough to keep taxable withdrawals from your pension below the higher-rate threshold.' How does the state pension work? AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046. The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age. But not everyone gets the same amount, and you are awarded depending on your National Insurance record. For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings. The new state pension is based on people's National Insurance records. Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension. You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit. If you have gaps, you can top up your record by paying in voluntary National Insurance contributions. To get the old, full basic state pension, you will need 30 years of contributions or credits. You will need at least 10 years on your NI record to get any state pension. He adds that this could be a particularly good idea for people who do not have a particular use in mind for their tax-free sum, such as paying off their mortgage. Andrew recommends that you add up your income from other sources and take the exact amount that will keep your total income below the tax threshold. Avoid emergency tax Once you have withdrawn the tax-free portion of your pension pot you will need to pay tax on any money you take out. When this happens, many savers are put on an emergency tax code. This happens because HMRC does not have an up to date tax code for you, so as a default it charges a higher estimated rate. You may then receive an unexpected tax bill and it can take months to get the money back. One way to avoid this is to take just £1 from your pension pot, which will trigger a tax code from HMRC. What are the different types of pensions? WE round-up the main types of pension and how they differ: Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest. Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore. New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all. Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes. Once you have the code you can withdraw money from your pot and will be charged at the correct rate. Check your pension provider's rules to make sure it will allow you to withdraw such a small sum of money. Use your Isa Isas are a great way to top up your income without paying any tax. This is because all money you withdraw from an Isa is tax-free, so it does not count towards your taxable income. To make use of them just make sure you withdraw less than £50,271 from your private pension. You can then top up your income with money from an Isa. Or if you do not want to pay any tax then simply claim your state pension and withdraw any extra money you need from your Isa. Pay into your pot If you are still working when you start to receive the state pension then you will be able to benefit from a tax loophole. This is because you can still pay into your private pension even if you are above the state pension age, which is currently 66. Robert Cochran, retirement expert at Scottish Widows, explains: 'This can be especially beneficial if your pension income pushes you into a higher tax bracket. 'Contributions may reduce your taxable income and bring you back into a lower band.' The maximum amount that you can pay into your pension once you are above the state pension age is £10,000. This can have a significant impact on the tax you need to pay. For example, if you earned £10,000 from your job and received the full new state pension then your total income would be £21,973 a year. In total, you would pay £1,878.80 in income tax. But if you paid the money from your job into your private pension then you would not pay any tax. Make use of marriage allowance You may also be able to save on your tax bill if you are married or in a civil partnership. Depending on how much you earn, you may be able to transfer some of your personal allowance to your partner. This tax perk is called marriage tax allowance. You can transfer up to £1,260 of your personal allowance to your husband, wife or civil partner. Doing so reduces your tax bill by up to £252 a year. To benefit you need to be earning less than your personal allowance, which is £12,570. Meanwhile, your partner must earn less than £50,270. website. .
Yahoo
7 hours ago
- Business
- Yahoo
3 Facts About Social Security Spousal Benefits All Couples Must Know
Spousal benefits can be more valuable than your own retirement benefits if your spouse was a higher earner. There are rules about when you can claim spousal benefits that you'll want to be aware of ahead of time. Decisions you make regarding your spousal benefits could also affect the amount of money you receive. The $23,760 Social Security bonus most retirees completely overlook › Deciding when to claim Social Security benefits is often complicated since you can start your checks any time between 62 and 70, and the decision impacts both lifetime and monthly benefits. The choice becomes even more complex if you're married because it's possible one spouse may want to claim spousal benefits instead of retirement benefits. Spousal benefits are calculated based on a spouse's work history instead of the claimant's work record. If you were a lower earner, you might benefit from getting benefits based on your spouse's salary record. However, there are a lot of rules that affect how much money spousal benefits can provide and when you are eligible for them. As a result, married couples should make sure they understand the details about how spousal benefits work before either partner makes a benefits claim. In particular, there are three big facts that married couples must know. One of the first and most important things that married couples must be aware of is that it's not possible to claim spousal benefits until the spouse whose record the benefits are being claimed under has filed for their retirement benefits to begin. Say, for example, you were a stay-at-home wife, and your husband earned a lot more than you, so you want to claim spousal benefits. You would have to wait until your husband claimed his retirement checks. This is the case no matter how old you are. So, if you turned 66 and your husband was 69, and you wanted to claim spousal benefits, but he was holding off on getting his retirement checks until 70, you would have to wait another year. It doesn't matter if your spouse has actually retired yet -- your husband could still work, and you could collect your spousal benefits -- but he must have started his Social Security payments, or you can't start yours. Now, a lower earner can file for their own benefits, based on their own work record, as soon as they turn 62. So, if you had worked and earned enough to qualify for your own payment, you could file and accept the benefits you personally earned. Then, when your spouse does claim retirement checks, you can switch over to spousal benefits at that point. Many couples use this strategy to start getting some Social Security money into the household while the higher-earning spouse delays benefits to increase the monthly income they'll eventually collect. It's also important to know how much spousal benefits are worth so lower earners can determine if they will be more or less than the amount they could get on their own work history. Spousal benefits cap out at 50% of the higher earner's primary insurance amount (PIA). That's the standard benefit they would get at full retirement age. It's based on average earnings throughout the 35 highest-earning years of their career. So, if the higher-earning spouse had a $2,000 standard benefit, the most the lower earner could receive is $1,000. If the higher-earning spouse waits beyond full retirement age to increase monthly benefits, they can end up with a larger check, but it won't affect spousal benefit payments. If you were a stay-at-home wife and your husband, who had a bigger salary, waited an extra year and brought his benefits to $2,160 by earning delayed retirement credits, your max spousal benefit would not increase to $1,080. It would still be $1,000. Finally, it's important to know that delayed retirement credits are not available for spousal benefits. Spousal benefits can be reduced if the person claiming them files for benefits to begin before reaching their own full retirement age. But they won't increase as a result of waiting longer to claim after FRA. This means there is no benefit to the lower earner to waiting beyond FRA, and they should start getting payments then if they can. By understanding these rules, married couples can make the best, most informed choices about when each spouse can claim benefits. By maxing out lifetime income through strategic claiming choices, hopefully, couples can set themselves up for more financial security as retirees. If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these Motley Fool has a disclosure policy. 3 Facts About Social Security Spousal Benefits All Couples Must Know was originally published by The Motley Fool Sign in to access your portfolio
Yahoo
8 hours ago
- Business
- Yahoo
Is a $4K Senior Bonus Better Than No Taxes on Social Security?
President Donald Trump touted a lot of ideas while he was campaigning for a second term and one of the proposals he consistently talked about was eliminating taxes on Social Security. It was a vow he made to the retirees, but now he could be reneging on his promise. Read More: Find Out: In the 'One, Big, Beautiful' tax bill there is no proposal for ending taxes on Social Security. Instead, there's a temporary $4,000 deduction. The bill offers a 'historic tax break' to Social Security recipients, 'fulfilling President Trump's campaign promise to deliver much-needed tax relief to our seniors,' White House assistant press secretary Elizabeth Huston said via email, CNBC reported. According to the outlet, the following stipulations would apply: Must be 65 or older The $4,000 deduction would be applicable for tax years 2025-2028 Single filers with more than $75,000 in modified adjusted gross income and married couples who file their taxes together who earn more than $150,000 would not qualify. While that is much different than completely getting rid of taxes on Social Security as promised, finance expert Andrew Lokenauth says it might be a better deal for many retirees. Here's why. For retirees who earn above the income guidelines, the $4,000 deduction won't be helpful, but it will provide financial relief for many older folks, according to Lokenauth. 'From my experience working with retirement planning, the $4,000 deduction is much better targeted to help lower and middle-income seniors.' He explained, 'I've seen how eliminating Social Security taxes primarily benefits wealthier retirees who have substantial other income, while doing nothing for the roughly 50% of seniors who already don't pay taxes on their benefits.' For example, if a retiree makes around $50,000 the $4,000 deduction would save them $500 annually in taxes. 'Not life changing but meaningful for many seniors managing fixed incomes,' Lokenauth said. Retirees in higher tax brackets will not notice a difference with their finances as a result of the $4,000 deduction. The impact will be felt according to income level. 'For seniors making under $75,000 individually or $150,000 jointly, that $4,000 deduction provides consistent, predictable tax relief of roughly $440-$880 depending on their tax bracket,' Lokenauth explained. Retired higher earners would save significantly from the elimination of Social Security taxes. 'I've worked with wealthy retirees who would save $5,000 annually from nixing Social Security taxes,' Lokenauth said. 'But here's the thing — they're not the ones who need the help most.' The $4,000 deduction is a far cry from getting rid of taxes on Social Security, but it will help offset some expenses for retirees.'I saw a middle-income client recently who'd save about $600 a year — enough to cover a few months of utilities or several weeks of groceries,' Lokenauth said. 'And because it's structured as a deduction rather than a credit, the benefit grows along with someone's tax bracket up to the phase-out thresholds.' For now, it looks like eliminating taxes on Social Security isn't an immediate priority, but the $4,000 bonus is in the bill and is far less expensive to implement. There's no comparison. 'I've looked at the budget implications, and this $4,000 deduction would cost about $200 billion over 10 years, while roughly 20% of eliminating Social Security benefit taxation would cost around $1 trillion,' Lokenauth added, 'Plus the deduction comes from general revenue rather than draining Social Security's already strained trust funds.'There are some positive aspects to the bonus proposal such as it works with either standard or itemized deductions, meaning more seniors can actually access the benefit. However, the time frame concerns Lokenauth. 'I've seen how temporary tax provisions create uncertainty. Congress really should make this permanent.'With that in mind, there is room for improvement, but Lokenauth said this is a more 'fiscally responsible approach that still delivers meaningful relief.' More From GOBankingRates 8 Common Mistakes Retirees Make With Their Social Security Checks Here's the Minimum Salary Required To Be Considered Upper Class in 2025 This article originally appeared on Is a $4K Senior Bonus Better Than No Taxes on Social Security?
Yahoo
9 hours ago
- Business
- Yahoo
Weighing Your Options: Claiming Social Security at 62 Versus 67
Other retirement income sources, health, and expected longevity are key factors in determining when to claim Social Security. The financial trade-offs in claiming benefits at 62 versus 67 can be significant. There is no one-size-fits-all answer as to when to claim Social Security retirement benefits. The $23,760 Social Security bonus most retirees completely overlook › When should I claim Social Security benefits? That's one of the most important questions Americans will have to answer as they approach retirement age. The most popular age for claiming Social Security is 62, the earliest age for which benefits can be received. However, the full retirement age for anyone born in 1960 or later is 67. If you're weighing your options about claiming at 62 or 67, there are several things you should know. One of the most important questions to answer when deciding whether to claim Social Security at age 62 or age 67 is whether you can retire comfortably without collecting Social Security benefits. If the answer is no, you will either need to claim benefits at 62 or hold off on retiring. You could continue working part-time (or even full-time) while receiving Social Security retirement benefits to help supplement your income. Keep in mind, though, that the Social Security Administration (SSA) will withhold $1 in benefits for every $2 you make above a specified limit ($23,400 in 2025) if you're under your full retirement age for the entire year. SSA will withhold $1 in benefits for every $3 you make above a higher limit ($62,160 in 2025) if you work during the year you reach your full retirement age. Two other key questions to answer relate to your health. First, are you healthy enough to continue working past age 62? If not, claiming Social Security at the earliest age possible could make sense. Note, though, that you should verify your eligibility for Social Security disability benefits before filing for retirement benefits. Second, do you have health problems (or a family history of health problems) that lead you to believe you won't live a long time after retiring? If so, claiming at 62 might be a smart choice. The explanation for this brings us to our next topic: financial trade-offs associated with claiming Social Security at 62 versus 67. If everyone received the same monthly benefit at age 62 as they would at 67, even more people would claim Social Security early. However, that's not the case. SSA will reduce your benefits by five-ninths of 1% for each month you collect retirement benefits before your full retirement age, up to 36 months. If you claim more than 36 months before your full retirement age, your benefit will be reduced by five-twelfths of 1% per month. How much does this early retirement penalty impact you if you claim Social Security at 62? Your monthly benefit will be a whopping 30% lower than if you waited until 67 to claim Social Security. That's a steep financial trade-off. But on the positive side, you begin receiving benefits from Social Security sooner when you claim at 62. The break-even age, where lifetime benefits from claiming at 62 equal the lifetime benefits from claiming at 67, is between 78 and 79 years old. If you don't expect to live past this break-even age, your cumulative lifetime benefit could be higher by claiming Social Security earlier. On the other hand, if you expect to live longer, holding off on claiming Social Security could be financially advantageous. The problem, of course, is that no one knows how long they'll live. However, a study published by the National Bureau of Economic Research (NBER) in 2022 found that more than 90% of Americans who had not begun receiving Social Security benefits would maximize their lifetime benefits by waiting until age 70 to claim benefits. What is the best age to claim Social Security retirement benefits? SSA is frequently asked this question. The agency's response is a good one: "The answer is that there's not a single 'best age' for everyone and, ultimately, it's your choice. The most important thing is to make an informed decision." The bottom line is that there's no one-size-fits-all answer. For some, claiming benefits at 62 is the smartest move. For others, waiting until 67 (or even 70) is preferable. Only you can make the right decision for you. If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these Motley Fool has a disclosure policy. Weighing Your Options: Claiming Social Security at 62 Versus 67 was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
a day ago
- Business
- Yahoo
Wondering What to Expect for Next Year's Social Security COLA? Here's What History Says Could Be Coming in 2026.
One historical trend points to a higher Social Security COLA in 2026. However, the Trump administration's tariffs are a big wild card. The $23,760 Social Security bonus most retirees completely overlook › Is it too soon to be wondering how much the next Social Security "raise" will be? I don't think so. Granted, we won't know for sure until the Social Security Administration (SSA) makes its highly anticipated announcement in mid-October. However, a little speculation a few months in advance doesn't hurt anybody. And history could provide some insight into what to expect with the 2026 Social Security cost-of-living adjustment (COLA). Americans have had two back-to-back years of lower Social Security COLAs after the sky-high increase of 8.7% in 2023. What has usually happened after two consecutive years of declining COLAs in the past? The historical odds point to a higher 2026 COLA. I looked back at annual Social Security COLAs since they became automatic in 1975. The Social Security increase for 1984 was lower than the previous year after two years in a row of declines. It was a similar story in 1994. However, in the other six cases, the Social Security COLA increased after two consecutive years of decreases. 2026 will be the second year under a different presidential administration than the previous two years. Have there been any clear historical trends with the COLA related to a new occupant of the Oval Office? Not really. There have been seven new presidential administrations since Jimmy Carter was in the White House. In the first full year of a new U.S. president, the Social Security COLA was higher than the previous year three times and lower than the previous year four times. Social Security COLAs are based on inflation. To be specific, they're calculated by comparing the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the year with the average CPI-W for the third quarter of the previous year. Anything that drives inflation higher will, in turn, cause the Social Security COLA to be higher. (The COLA can be 0%, but it's never negative.) That's where President Donald Trump's tariffs come into play. Many economists believe that steep tariffs could lead to a resurgence in inflation as importers pass along higher prices to consumers. The Federal Reserve agrees. The minutes from the Fed's meeting earlier this month revealed that nearly all of the 19 officials saw a risk of higher inflation due to Trump's tariffs. What does history tell us about Social Security COLAs after steep tariffs were implemented? There aren't many precedents. The first Trump administration levied tariffs on many products imported from China, but those tariffs were much more limited than those implemented this year. Inflation and the Social Security COLA still rose, though. Perhaps the most similar previous occurrence of high tariffs came when Richard Nixon was president. In August 1971, Nixon implemented 10% tariffs for four months. However, this was before automatic annual Social Security COLAs went into effect. Still, the next Social Security increase, which required congressional action, was a whopping 20%. I don't think history is all that great of a guide in helping predict what the 2026 Social Security COLA will be. The reality is that the present is more important than the past, at least where COLAs are concerned. The Senior Citizens League (TSCL), a nonprofit organization that advocates for seniors, updates a model used to project the next Social Security COLA every month. Its latest forecast is for a 2026 COLA of 2.4%, slightly lower than the 2.5% increase this year. This would be the lowest COLA since 2021. However, the TSCL's projection could change dramatically if tariffs cause inflation to soar. Retirees will have to keep wondering about what the 2026 COLA will be until October. If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these Motley Fool has a disclosure policy. Wondering What to Expect for Next Year's Social Security COLA? Here's What History Says Could Be Coming in 2026. was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
