Summary
'State Pension' is treated as a yearly income source 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
State pensions are a cornerstone of retirement planning for many individuals. In Timeline Planning, state pensions are treated in gross terms, allowing for a complete financial overview. This article will explain how National Insurance and Income Taxes are calculated for the 'State Pension' income type and how it appears in cash flow charts.
State Pension Explained
In Timeline Planning, a state pension is considered a yearly income source. Advisors can input the gross annual amount of the pension, which is defaulted to £11,502 for the year 2024 but can be changed to any value.
State pensions can be adjusted fully for inflation based on the Consumer Price Index (CPI).
If you wish to apply triple lock then you can select "Other Income" with a 2.5% collar. In this case
If a given year the CPI was less than 2.5%, the state pension will increase by 2.5%.
If the CPI is more than 2.5% in a given year, the state pension will be adjusted for the exact CPI.
Step #1: National Insurance Tax
For income received from a state pension, no National Insurance taxes are applied.
Step #2: Income Tax
Income tax for the 'State 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 Joe, who receives an annual state 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 Joe has to pay is £15,432, leaving him with a net annual income of £54,568.
Conclusion
The 'State Pension' income type in Timeline Planning offers a structured way to plan for a stable income during retirement. Understanding how National Insurance and Income Taxes are calculated can help advisors and clients make more informed financial decisions.