The burden of tax in retirement

Savers need to consider all retirement income solutions in order to achieve a degree of certainty

The average UK pensioner household pays out 29 per cent of its income in retirement to the taxman through a combination of direct and indirect taxation, which adds up to an annual tax bill of nearly £42bn, new analysis
[1] from MetLife shows (25/07/12).

Pensioner household income
On an average gross pensioner household income of £20,130, that equates to £5,864 paid out in tax, with income tax accounting for nearly £1,501 of the bill and indirect taxes including VAT totalling £1,937. Council tax is the third-largest tax burden, accounting for
5.8 per cent of gross income.

With an average tax liability of £5,864 for the UK’s 7.15 million retired households, the bill from direct and indirect taxation equates to around £41.9bn. In total, direct taxes, including income tax and council tax, account for 12.2 per cent out of the 29 per cent tax burden with indirect taxes, including VAT, duty on tobacco, alcohol and petrol, vehicle excise duty and TV licences, accounting for 16.8 per cent.

Direct and indirect tax
However, less well-off households proportionally pay out the most in direct and indirect tax with 42 per cent of their gross household income being paid out in tax. The bottom tenth of pensioner households, in receipt of gross income estimated at £8,259 a year, pay £3,599 in taxes.

The top 10 per cent of pensioner households, with gross income of £47,992, see 29 per cent of their income going in direct and indirect tax.

Planning for retirement
Pensioners need to think about the effects of direct and indirect tax on their retirement income and plan accordingly. With 29 per cent of gross retirement income being swallowed up by tax, it is clearly a major factor to consider when planning for retirement.

When you add in the potential effects of inflation in a retirement lasting up to 20 or even 30 years, it is clear that savers need to consider all retirement income solutions in order to achieve a degree of certainty.

Investments and savings

MetLife’s analysis shows that the average retired household receives 40 per cent of its gross income from private and occupational pensions, with 39 per cent coming from the State Pension and the rest coming from investments and savings plus other benefits. The average private pension pays £8,134 per household before taxes.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.

[1] MetLife analysis of the ONS Wealth and Assets Survey. ONS estimates that there are 7.151 million retired households.

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