Summary
'Defined Benefit' pensions are treated as yearly income sources in gross terms.
No National Insurance taxes are applied to this income type.
Income tax is calculated based on the most recent tax rates and bands.
Introduction
Defined Benefit (DB) pensions are a reliable source of income for many retirees. In Timeline Planning, DB pensions are always treated in gross terms, offering a complete overview of your financial situation. This article will explore how National Insurance and Income Taxes are calculated for the 'Defined Benefit' pension income type.
Defined Benefit Pension Explained
In Timeline Planning, a Defined Benefit pension is considered a yearly income source. Advisors can input the gross annual amount of the pension and then calculate the net value that the client would receive.
Like other income types, a Defined Benefit pension can be adjusted for inflation based on the Consumer Price Index (CPI). If this option is selected, a 0% collar is applied, ensuring that the income will not decrease even in times of deflation.
Step #1: National Insurance Tax
For income received from a Defined Benefit pension, no National Insurance taxes are applied.
Step #2: Income Tax
Income tax for the 'Defined Benefit' pension type is computed based on the most recent tax rates and bands. The total tax is then subtracted from the gross income to arrive at the net income value.
Example
Let's consider Kieran, who receives an annual Defined Benefit pension of £70,000. Timeline Planning calculates his income tax as follows:
£12,570 * 0% = £0
(£50,270 - £12,570) * 20% = £7,540
(£70,000 - £50,270) * 40% = £7,892
The total income tax Kieran has to pay is £15,432, leaving him with a net annual income of £54,568.
Conclusion
The 'Defined Benefit' pension income type in Timeline Planning provides a structured way to plan for a stable income during retirement. Understanding how National Insurance and Income Taxes are calculated for this income type can help advisors and clients make more informed financial decisions.