Pensioners and tax

Tax planning in retirement can often be more complex than it is during your working life.

It is not unusual for a retired person to have a minimum of three different taxable incomes - their State pension, a private or occupational pension and interest on savings or investment income.

In contrast, during our working lives it is typical to have only one - a salary from employment, which is taxed through the relatively simple Pay As You Earn (PAYE) system.

It is this more complex set of incomes in retirement which pushes many older people into the Self Assessment regime and can also lead to the underpayment or overpayment of income tax.

New figures published today by the National Audit Office suggest that 1.5 million pensioners have overpaid a total of £250 million in tax since the 2002/03 tax year. This is an average tax overpayment of £171 each.

Equally as concerning, a further 500,000 pensioners are thought to have underpaid tax by an average of £207 each.

Tax does often become more complex in retirement. The interplay of different sources of income along with higher age related personal allowances can make it tough to know if you are paying the correct amount each tax year.

It will take real change from HM Revenue & Customs along with more retired people taking a closer interest in their financial planning to bring these numbers down over the next decade.