The analysis of the most recent available data shows that in the 2011-2012 tax year, the average retired household paid £6,400 in tax from a gross income of £21,300. That equates to a total of £45.6 billion paid in taxes by all retired households.
Stan Russell, retirement income expert at Prudential, said:
“Retiring from work doesn’t mean that you are retiring from paying tax. Whether you are liable for income tax or you are paying VAT on your purchases, the contributions you make to the Exchequer will continue throughout your retirement.”
VAT and income tax are the largest duties retirees find themselves paying – each consuming eight% of the average retired household’s annual income – council tax also accounts for around four%. Indirect taxes other than VAT, including vehicle excise duty, taxes on alcohol, tobacco and petrol, combine to take a further 10%.
Of the 30% of its annual income that the average retired household pays in tax, just under three fifths (£3,800) is in indirect taxation. As such, retired households with lower incomes are likely to find themselves paying out a greater proportion of those incomes in tax.
Stan Russell added:
“The changes to pensions and how people can take their retirement income announced in the Budget last month will provide savers and retirees with more choices and will affect the way that tax is applied. Irrespective of these changes, the fundamental principles remain true – the best way to secure your desired level of retirement income is to save as much as possible as early as possible in your working life.
“Previously our research has shown that retirees are becoming more optimistic about the income they expect to receive when they stop working. However, these latest figures are a stark reminder that not all the income you receive in retirement will be yours to spend as you like. A consultation with a financial adviser or retirement specialist before making any choices about retirement income solutions is a must for those looking to make the most of their pension savings without the risk of paying an unexpected amount of tax.”
