Saving ahead for your future retirement is always a good idea. But a new year often comes with new pension regulations that can have a big impact on your finances in 2022 and beyond.
To help you get up to speed and understand how to make your money go further, we’ve found answers to common pension questions. In this guide, you'll learn whether pensioners pay council tax, how pensions rank against ISAs and more.
Do pensioners pay council tax?
For most people, retirement means not having to deal with the commute or school runs. But becoming a pensioner doesn’t necessarily mean you’re off the hook when it comes to paying Council Tax.
Most people pay Council Tax if they’re aged 18 or older. And if you live with someone else, you may have to pay a full Council Tax bill. What you pay depends on your home’s valuation band, potential discounts or exemptions on your bill and the charge for your particular band.
Council Tax discounts and reductions for pensioners
On top of rising food and energy costs, Council Tax bills can deplete your pension income. The good news is that there are discounts, rebates and reductions in 2022.
Council Tax discount
You may not have to pay or might qualify for a discount if any of the following apply:
- You’re a full-time university or college student
- You’re registered with the British Council as a foreign language assistant
- You have a severe mental impairment
- You’re a diplomat
- You’re a live-in carer for a person that’s not your partner or spouse, or a child under 18-years of age
If any of the above apply to you, you’ll need to apply for a discount on the UK government’s Council Tax discount page.
Your discount will depend on your circumstances - and could mean a 25% discount if you currently pay Council Tax and live by yourself, or even with others who don’t pay. If everyone in your household is disregarded for Council Tax, you could also get 50% off your bill.
Council Tax Reduction
There’s another chance for pensioners to save money when they pay their Council Tax bills this year. To combat inflation, the Department of Levelling Up, Housing and Communities wants local councils to raise the eligibility threshold for pensioners that are on low-incomes or receive benefits such as Pension Credit.
This means that from April, pensioners will be eligible to apply for 100% off their council tax bills if their weekly income is below a certain amount under the Council Tax Reduction scheme. Single pensioners may be eligible if their income is below £197.10 during 2022-2023.
Your eligibility will depend on where you live, your circumstances, household and other factors. To check your eligibility, visit the government’s Council Tax Reduction application page.
You can also take advantage of a similar scheme if you live in Northern Ireland. The nidirect's help with rates for pensioners page includes helpful info on how to get support with your rates.
Council Tax Rebate
From October, households in England in Council Tax bands A-D will be eligible for a £150 Council Tax rebate. If you qualify, your local council will issue your rebate from April. You’ll receive a one-off payment into your account if you pay by Direct Debit. If you pay another way, you’ll need to raise a claim with your local council.
Pension increase for 2022
From 11 April 2022, pensioners receiving the basic State Pension will now get £141.85 in their pockets each week. While people receiving the full rate of the new State Pension can also look forward to £185.15.
But if you have yet to retire, the age at which you can start taking your State Pension may change. To date, it’s set to increase to 68 for both men and women between 2044 and 2046. A new government review could mean that it’s brought forward to somewhere between 2037 and 2039.
We’re living longer than ever in the UK. And, this potential 2022 pension increase could help you better prepare for retirement. While this means you’ll need to wait to claim your State Pension, waiting can have its benefits. Waiting could mean your investments have a longer time to grow and you’ll earn extra interest if you have ISAs or other savings accounts.
Qualifying earnings for pensions
First, what are qualifying earnings? They're a band of earnings that help your employer work out your contributions if you’re auto-enrolled in your workplace pension. To be eligible for auto-enrolment, you’ll need to meet four criteria:
- You earn £10,000 or more per year. (This is equal to £192 per week or £833 if you’re paid monthly.)
- You’re considered a ‘worker’
- You’re between the ages of 22 and State Pension age
- You typically work in the UK
Automatic earnings trigger in 2022/2023
In February, the government confirmed that the £10,000 minimum earnings level will remain the same for 2022-2023.
Each year, the Department for Work and Pensions reviews the threshold for qualifying earnings and updates go into effect from the start of the next tax year. To date, they’re between £6,240 and £50,270 for the 2021/2022 tax year and will also remain the same for 2022/23.
Your pension contributions and tax relief
By law, your total pension contribution must be 8% when you’re enrolled into a workplace pension. This means you’ll need to contribute 5% and your employer handles the remaining 3%.
For example: A basic rate taxpayer that made a contribution of £80, would get £20 from the government - for a total of £100! That’s an extra £240 in your pension pot every year.
You also get tax relief on your pension contributions depending on the rate of tax you pay:
- 20% tax relief if you’re a basic-rate taxpayer
- 40% tax relief if you’re a higher-rate taxpayer
- 45% tax relief if you’re an additional-rate taxpayer
While saving money will no doubt be an important consideration for 2022 with rising food and fuel costs, it’s worth considering whether you can increase your pension contributions.
Of course, you’ll have less take-home pay, but a smaller paycheque could help you find peace of mind, giving you a larger pension pot when you reach retirement. Paying into a workplace pension could also offer other perks such as lower student loan repayments or tax credits. Some employers also match your contributions if you decide to pay more into your pension.
For more information about workplace pensions, see the government’s joining a workplace pension page. You can also work out how much is paid into your pot with Money Helper’s workplace pension calculator.
Pensions vs ISAs
There is no escaping the fact that the UK cost of living is ever-rising, and is becoming an increasingly worrying issue for people from all walks of life. There has never been a more prominent time to consider your retirement strategy, securing financial stability for your twilight years.
Choosing the right financial package to suit your needs can be a daunting task. It’s something we must get right, however many of us struggle to wade through endless variations of products to find the best one. But the question that many people will have on their minds is: what is the smartest choice for me - a pension or an ISA?
There are many personal factors which will feed into your answer. Ultimately, it all depends on how you’d like to access your money or what would you like to achieve? We’ve highlighted some of the main benefits of each option to help you decide.
But first, what is an ISA? It stands for ‘individual savings account’ and is a type of savings account that lets you save extra cash in a tax-efficient way.
Here’s a quick overview of its benefits:
- You can save up to £20,000 every tax year. This can be paid into a stocks and shares ISA, Cash ISA or combination of both
- You won’t pay Income Tax on interest or dividends
- Profits from any investments won’t be liable for Capital Gains Tax
If you’re thinking about opening an ISA, you’ll have a few types to choose from. Many banks and building societies offer their own unique products, so it’s worth thinking about what you’d like to save for and how you’d like to access your cash, to help you narrow down your options.
The main types of ISAs:
- Cash ISA: A common type of ISA which lets you save in cash and access it quickly.
Stocks & Shares ISA: Invest your savings with the potential of growth. However, this type of ISA comes with a higher risk, meaning there’s a possibility you could lose money.
- Lifetime ISA: This option is designed for people aged 18-40 and can help you either save for retirement or get on the property ladder. You can only access your money when you buy your first home or turn 60. Remember, there’s a penalty for cashing out early!
- Junior ISA: Allows you to invest tax-free for a child in a cash or stocks & shares option ISA. As of 2021/22, you can save up to £9k during the tax year. When a child turns 16, ownership of money goes to them, but they’ll be able to withdraw it when they turn 18.
In short, pensions are a product that help you put money aside to save for retirement. They’re also a long-term savings plan that comes with many perks.
Depending on your circumstances, you may have a few options available to you such as a workplace pension offered by your employer. Here’s a quick overview of their benefits:
- You should be able to take up to 25% of your pension pot as a tax-free lump sum when you retire
- You also get the benefit of tax relief! This comes in the form of either an annual allowance of £40,000 every tax year, or 100% of your annual earnings. Tax relief is applied to the lowest figure of the two options
When it comes to pensions, there are three key ways to save for retirement if you live and work in the UK:
- Workplace pension - This type of pension is offered to you by your employer. The majority of employers should automatically enrol employees into this type of scheme if their salary exceeds £10,000 per year
- The State Pension - A regular government payment once you reach State Pension age. You must ensure you have enough qualifying years in your National Insurance record to be eligible.
- Personal pensions - This could be an option if you’re unemployed or don’t have access to a Workplace Pension. This can be set up by yourself, even if you’re already enrolled in a workplace pension. Check out our Personal Pensions guide for more info.
Pensions vs ISA’s key differences
The age-old debate of whether you should invest in a pension or an ISA could leave you with more questions than answers. But, what it really boils down to two key questions: how early you want to access your cash, and how important reducing tax is to you.
To help you decide, here are some key points to consider:
- Typically, you can’t withdraw pension funds until you reach the age of 55 (without a penalty)
- You can withdraw up to 25% of your pension pot tax-free, and anything you take over that amount is taxed at your current tax rate
- If you’re a basic rate taxpayer, you’ll get 20% extra in tax relief
- You don’t pay tax on interest earned with an ISA
A pension might be a better choice if you want to take advantage of tax breaks and are willing to wait to access your money. If you have a workplace pension, you’ll also benefit from employer contributions, which can help you save more. But if you’re saving for something in the medium term, such as a house or want to easily access your cash before you retire, you may consider an ISA.
Deciding on how to invest your money for the future is a big decision. So, if you’re still unsure of what the right option is for you or need an expert option, speak to a financial advisor. They’ll get to know you, and your goals to help you find the most tax-efficient way to get the most of your money.
The Department for Work and Pensions is meeting until 31 March 2022 to discuss plans for a pension dashboard. The long-awaited dashboard will give you the opportunity to view all your workplace pension pots online - even if you’ve changed jobs.
With your pension information in one handy place, you’ll get a clearer view of your pension income - including your entitlement under the State Pension. This can help you make a more informed decision about your future - including the decision between selecting a pension or an ISA.
Pension scheme members will launch their own individual dashboards that will be managed by the Financial Conduct Authority. Currently, there’s no set date for the launch, but once the dashboard launches, you’ll be able to view your:
- Workplace pensions
- Estimated State Pension amount
- Date for State Pension eligibility
If you need guidance to help you decide between pensions or ISAs, the government’s Money and Pensions Service can offer support. But if you’d like personalised advice, a financial advisor will work with you to give you recommendations based on your unique circumstances.
How can a financial advisor help you?
There are many financial advisors out there. And if you’re looking for advice, it can feel daunting to reach out for help. That’s why at Local Financial Advice, we designed our free financial advice matching service. Fill out our simple form and our friendly team will listen to your needs and connect you with an expert that's right for you.
Whether it’s accessing your pension or minimising inheritance tax, we’ll help you connect with the right expert for your needs. Your advisor will review your financial situation and offer a free consultation to help you decide if advice could work for you. Getting advice could also help you feel more confident with your finances, and gain peace of mind about the future.
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How much does financial advice cost?
Financial advice is an investment that could help you make the most of your retirement and other financial goals. A financial advisor’s job is to help you get the most from your investments and prepare for the future.
Like any specialist service, when you get advice, you’re tapping into their expert knowledge and qualifications that take time and dedication to achieve. That’s why financial advice comes with a cost. Depending on your advisor and what you need advice on, this could be a one-off free, hourly or ongoing fee.
During your free consultation, your advisor will always be clear about any fees and associated costs in taking advice. They’ll also point you in the right direction if they feel advice isn’t a good fit for your needs. And with no obligation to take advice, this helpful session could help you gain the insight you need to make the most of your money in 2022.
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