Retired lose 1/6 of annual income to direct taxes

13 April 2021

Retired households lose one sixth of their income a year to direct taxes, new research from Key has revealed. 

Income tax and council tax take 13.9% off the average retired household’s pre-tax income of £31,674, equating to around £4,078 a year.

However, government data showed benefits contribute around two fifths – nearly £13,000 a year – of the average retired household’s pre-income tax, with the majority of that sum coming from the state pension and the rest from a range of other benefits including Disability Living Allowance and Housing Benefit.

Key said its analysis showed average disposable incomes for retired people fell in the 2020 financial year from the previous year by nearly 12%, largely as a result of lower private pension income and investment income. On average, retired households received £12,102 from private pensions in 2020 compared with £14,756 previously, while investment income dropped from £2,933 to £2,084.

Will Hale, CEO, Key, urged retirees to budget for income tax and council tax as part of their retirement planning.

Hale said: “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.”

Professional Paraplanner