What is the tax burden you are likely to face in retirement? A new study has found that retired households pay almost 14% of their annual income in direct taxes.
The analysis from key found that income tax and council tax add up to 13.9% on average for retired household’s pre-tax income.
With a typical pre-tax income of £31,674 a year, retired households need to make every penny count, and take care to minimise their tax liabilities where possible.
The study found that retired households pay an average of £4,078 a year in direct taxes, for a total of more than £45 billion.
However, the government data examined in this study also shows that benefits contribute to around two-fifths of the average retired household pre-tax income.
On average, retired households receive almost £13,000 in benefits, ranging from the State Pension to Disability Living Allowance and Housing Benefit.
Also within the analysis was a finding that average disposable incomes for retired people fell in the last financial year, down by nearly 12%.
Much of this cut in income levels was the result of lower incomes from private pensions and investments.
Retirement households received an average of £12,102 from private pensions last year, down from £14,756 a year before. Investment income fell from an average of £2,933 to £2,084.
Will Hale, CEO at Key, said:
“While national insurance contributions cease when you retire, you still need to pay income tax and council tax so it pays to budget for these bills as part of your retirement planning. If you haven’t accounted for tax within your budgeting, losing almost 14% of your household income can have a significant impact on your standard of living throughout retirement.
“Taking advantage of tax-free savings and checking that you are on track to receive the full state pension are simple steps that you can take to ensure that you are best placed to ride out any income fluctuations in retirement.
“Taking a holistic view of all your assets, including your home, is also important as there may be a number of options to create additional income when needed. When considering your options it is vital you take specialist financial advice and, for those with more complex affairs, specialist tax advice may also be beneficial.
“Paying some form of tax is a reality for most retired people but how this impacts on their household income and aspirations is something that they can manage through careful planning.”
There is also a big difference between retired households in terms of the taxes they pay, with the wealthiest 10% paying £14,680 a year in direct taxes, equivalent to 19% of gross income of nearly £77,000 a year.
The more income you have in retirement, the more important it is to ensure you carefully plan for taxes.