Pensioners who think they have enough money for a comfortable retirement fail to realise that they must hand over almost a third of their annual income in tax, according to new research.
Tax destroys the financial plans of many as the government collects a massive £52.7 billion a year from the hundreds of thousands who have given up work.
The average retired household pays £7,400 a year in direct and indirect tax, says the Prudential after analysing household wealth data from the Office of National Statistics.
Tax increased by around £400 a month in the year to April 2016, while incomes rose by £1,200 to just over £25,000 a year.
Hidden taxes
The damage to retirement finances comes from indirect taxes.
While retire households pay an average £3,050 in direct tax, like income tax and council tax, the rest comes from hidden taxes included in spending, such as VAT, insurance premium tax and road tax.
The amount of tax paid by retired households has remained at a similar level for the past three years – 30.1% in 2013-14; 29.7% in 2014-15 and 29.6% in 2015-16, which is the latest period for which figures are available.
On average, says the ONS, working households pay 34% of annual income in taxes.
Tax bills into retirement
Stan Russell, a retirement income expert at Prudential, said: “Not working doesn’t mean you don’t pay taxes, and many retired people will still need to consider income tax bills as well as all the other indirect taxation on expenditure that they will continue to face when they give up work.
“We have seen income expectations for new pensioners rise in recent years which, for many will mean that they continue to face tax bills well into retirement. People planning to give up work should make sure they don’t underestimate the impact that tax will have on their income.
“Saving as much as possible as early as possible during their working lives should help people to plan ahead with more confidence. Creating a long-term plan to set a target income level and a better understanding of the tax implications can help.”