Over 55s warned they could face a tax ‘shock’ on their retirement income | Personal Finance | Finance

New research warns that over 55s may face a potential “shock” in retirement, as thousands remain unaware that their income will be taxed.

A survey by Shawbrook Bank revealed that nearly one in three near-retirees (30%) are unaware of the tax implications. The knowledge gap is especially pronounced among women aged 55 to 68 to 35%, compared to 23% of men in the same age group.

While almost half (46%) of near-retirees know that they will face taxes in retirement, only a quarter (25%) are certain, and 22% are unsure but believe it’s likely.

Retirement income, including pensions, is taxed similarly to employment income, leaving many retirees potentially unprepared for the financial impact.

While up to 25% of a pension pot can be withdrawn tax-free – capped at £268,275 – the remainder is subject to income tax.

However, as pension values rise and savings benefit from higher interest rates, the likelihood of retirees facing income taxation increases.

Adam Thrower, head of savings at Shawbrook, commented: “A shock tax bill is never welcome, especially for those planning or entering retirement.

“It’s essential to understand that income tax still applies in retirement, and savers should consider how best to structure their savings.”

Shawbrook’s research found that 77% of near-retirees view a savings account as an integral part of their retirement plan. However, with the Personal Savings Allowance (PSA) frozen, many may also find themselves hit with unexpected tax bills on their savings.

The PSA is £1,000 for standard-rate taxpayers, but this drops to just £500 for higher earners, with additional-rate taxpayers receiving no allowance at all. In contrast, ISAs offer a tax-free savings limit of £20,000 per year, making them a critical tool for those hoping to shield their retirement savings from tax.

Mr Thrower continued: “ISAs are a powerful way to keep savings tax-free, and with competitive interest rates, savers could be caught off guard by how much tax they owe if they don’t plan carefully.

“As retirees increasingly rely on savings for income, understanding how to maximise tax efficiencies could make a significant difference in securing a more comfortable retirement.”