When it comes to how much savings a pensioner can have in the bank, you’ll be pleased to know there’s no limit. But that’s just the short answer. It gets more complicated because, in the UK, your savings can impact means-tested benefits and credits and how much tax you pay.
What matters most to you will depend on your personal circumstances.
Suppose you’re a higher earner and unlikely to qualify for means-tested benefits. In that case, you’ll want to manage your savings in a tax-efficient way – and maximise your return on savings (using a platform like Insignis) and investments securely.
But if you are likely to qualify for benefits, it’s useful to understand how savings can influence how much you receive so you can manage your savings accordingly.
In this article, we’ll take a look at the ways that the savings you have in the bank can impact on both tax and benefits, and suggest some ways you manage your money efficiently. We’ll look at:
NOTE: If you already know you won’t qualify for any means-tested benefits in the UK, skip to the section below on maximising your savings as a pensioner.
Once you reach the state pension age of 66, there are certain benefits you can no longer claim for, including Jobseekers Allowance and Universal Credit.
However, there are other benefits that pensioners can receive. Some of these, such as Child Benefit and Carer’s Allowance, are not means-tested, which means your income and savings will not affect whether you qualify for them.
Other benefits for pensioners are means tested. These include Pension Credit, Savings Credit and Council Tax Reduction. How much savings you have in the bank is one factor that can determine whether you receive the benefit, and/or how much support you qualify for.
Pension Credit is separate to your state pension and provides a boost for those on a low income.
If you or your partner are both over the state pension age, and one of you is receiving housing benefit, then you’ll be eligible to have your weekly income topped up. If you are single, it will be topped up to £218.15 per week, or £332.95 if you have a partner.
Your income will be calculated from any earnings you have, including any pensions you have and most social security benefits.
The amount of savings you have in the bank will also be taken into account. People of pension age can have up to £10,000 savings in the bank before it affects their pension credit. So if you have savings over £10,000, it will start to count towards your income calculation.
Every £500 over £10,000 will be calculated as £1 additional income per week. So, if you have savings of £20,000 it will count as an additional income of £20 per week.
This means a single pensioner with a pension or earnings of £198 per week and £20,000 savings would have their income calculated at £218 per week and would not qualify for a top-up from Pension Credit.
If you reached the state pension age before 2016, there is another benefit to consider called Savings Credit. This is calculated separately to Pension Credit and is an extra top-up payment.
Savings Credit is also calculated based on your income and provides a maximum weekly payment of £17.01 if you are single, and £19.04 for a couple.
Just like with Pension Credit, if you have savings over £10,000 these will count towards your income and influence how much you receive.
Another benefit that can be helpful to pensioners is Council Tax Reduction. If you receive Pension Credit you might get your council tax paid in full, but again, income and savings are a factor in how this is calculated.
Council Tax Reduction schemes are determined by each local authority. Eligibility varies depending on where you live, however if you have a low income and savings below £16,000 you may qualify for some help.
It’s worth contacting your council to find out if you qualify for Council Tax Reduction – and how much help you could receive.
Another important thing for pensioners with savings in the bank is tax. That’s because over a certain threshold, you will need to pay income tax on any interest earned from your savings.
Right now, the standard personal allowance – that’s how much income you can earn before you pay tax – is £12,570. State pension and other pensions you may receive count towards your income. On top of this, you can earn up to £5k interest from your savings each year without paying tax. This is called the starting rate for savings. If your income is higher than the standard personal allowance, then the starting rate on your savings starts to come down.
For every £1 earned above the standard personal allowance, the starting rate on savings is reduced by the same amount. So, for someone with an income of £14,500, there’s a reduction on the starting rate of £1,930. This means they can earn interest of up to £3,070 on savings before it gets taxed. However, an income of £17,570 or higher (£5k+ above the standard personal allowance) wouldn’t qualify for the starting rate – so any interest earned from the savings is taxable.
For pensioners on a higher income and who have more savings in the bank – in particular, if you are unlikely to qualify for any means-tested benefits – it is important to manage your money in a way that is tax efficient and gives it the best chance to grow.
Plenty of options are available, such as tax-free savings accounts and investment products that shelter your funds from tax, as well as competitive savings products that enable you to accrue interest at a healthy rate.
If you’re managing a large amount of savings, it is likely that you could benefit from diversifying your savings across a number of different products to maximise the benefits. If this is the case for you, a platform such as Insignis will help you find the best rates and make it easy to switch accounts.
But first, let's take a look at some of the main options that can help pensioners maximise their savings.
ISAs, or Individual Savings Accounts, are an easy way to grow your savings without paying additional tax. Interest earned from these accounts does not count towards your personal tax allowance (although the money in ISAs does count as capital and can therefore affect eligibility for some means-tested benefits).
There are different types of ISA that suit different needs.
A Cash ISA is the closest to a traditional savings account; a fixed Cash ISA will offer a higher interest rate than one that provides instant access.
Stocks and Shares ISAs allow you to grow your savings through a variety of investments.
The Innovative Finance ISA, enables you to invest in peer-to-peer lending is a riskier option, albeit with the chance of higher returns.
(Note: You may also know about the Lifetime ISA, which helps people save for retirement or to get on the property ladder. However, the Lifetime ISA is only available for those aged between 18-40, so is not an option for those of retirement age.)
National Savings and Investments (NS&I) offer another tax-free investment product called Premium Bonds. While a traditional savings account helps you grow your money through interest and dividends, Premium Bonds operate as a monthly lottery.
You can purchase bonds at a cost of £1 each – up to a value of £50,000. Every month these are entered into a prize draw with the chance to win anything from £25 to £1 million.
The odds of winning a prize each month are 1 in 21,000, which equates to a 3.3% average annual return. It may be lower than the average savings accounts, but can be another useful option as part of a wider saving portfolio. Those holding the maximum amount of premium bonds have the best odds of making annual gains, but that doesn’t mean others can’t get lucky.
For some, the chance – and fun – of potentially winning big is part of the appeal.
Another way to put your savings to good use is to contribute to a ‘children’s pension’ pot.
Grandparents can’t set these up themselves – the account has to be started by a parent or guardian – but once it is up and running anyone can contribute.
Children’s pensions are a tax efficient way to save for their future retirement.
Each tax year – which runs from April to April – up to £2,880 can be put into the account, which the government will then top up by £720. When the child turns 18, they take ownership of the account.
If you have a large amount of savings in the bank – and you’re therefore unlikely to qualify for means-tested benefits – one of the best ways to maximise your funds is to build a diverse cash portfolio across multiple accounts.
There are many, many options out there across a wide number of banks and building societies, all offering different saving products to suit different needs. But chasing the best rates is incredibly time-consuming – especially if that means switching and setting up new accounts with various different providers.
That’s where Insignis comes in. We offer a one-stop solution to help you maximise your savings, providing you with access to 3,500 saving products from 45+ banks and building societies.
With one account you can manage your savings across a wide number of options – and access competitive and exclusive interest rates in the process.
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