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Retirees feel the pinch: 30% of income goes on tax

Retirees feel the pinch: 30% of income goes on tax

Category: Retirement

Updated: 30/05/2014
First Published: 30/05/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Paying tax might be a necessity, but it isn't a prospect that many of us relish. Spare a thought, then, for retirees, as research has shown that approximately 30% of their annual household income will go straight into the taxman's pocket.

Retirement specialist Prudential has analysed official Government data to reveal these statistics, finding that in the 2011/12 tax year – the latest year figures are available for – the average retired household contributed £6,400 per year in tax from a gross annual income of £21,300.

These tax payments are made up of both direct and indirect taxes with income tax, VAT and council tax being the biggest outlays – income tax and VAT account for 8% of average income while council tax takes up 4% – and the likes of vehicle excise duty, taxes on alcohol, tobacco and petrol take a further 10%.

Stan Russell, retirement income expert at Prudential, commented on the findings:

"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. Retiring from work doesn't mean that you are retiring from paying tax."

That means it's more important than ever to maximise your income, and happily the changes announced in the 2014 Budget will offer retirees increased flexibility over how they can spend their pension pot.

But, as Stan adds, "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.

"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."

However, it seems that not everyone is taking that advice. Additional research from MGM Advantage has revealed that a large proportion of over-55s will choose to manage their financial affairs on their own rather than seek professional guidance, which could have a huge impact on the amount of retirement income they achieve – and even how much tax they pay.

The figures show that 33% of those aged 55+ who have not yet retired won't value financial advice at all – a figure which, perhaps worryingly, rises to 38% for those with household incomes of less than £30,000 – with 38% having never sought advice about their retirement options.

Of those, 31% feel confident enough to plan their own affairs while 12% won't discuss their plans with anyone else as they feel their financial affairs are private. An additional 44% think they won't need an independent financial adviser (IFA) – and 36% don't even know what one is – despite the fact that 41% aren't aware of the options available to help them generate a retirement income.

A lot value the internet in terms of providing retirement financial advice (20% of respondents) while 18% trust their pension provider and their family, however this may not be sufficient to determine the best possible outcome.

The guidance guarantee offered in the Budget is something which needs to be taken advantage of, particularly given the increased flexibility offered, as it could be the best way to ensure the right options are chosen to maximise income throughout retirement.

Andrew Tully, pensions technical director at MGM Advantage, said:

"The guidance guarantee is a crucial piece of the Budget jigsaw. Just as your choices at retirement increase, so those decisions become more complex.

"Given that the need for proper financial advice is even more important after the Budget proposals, it is extremely concerning that so many people do not value it and believe they are able to make decisions about how to best finance their retirement by themselves.

"If people do not seek expert help when considering their options for retirement, we could see many people making poor choices, such as paying too much tax, or investing in poor value solutions."

The advice, then, is clear – to stand the best possible chance of maximising retirement income and even reducing your tax liabilities, seeking expert guidance is key. It's even been suggested that the Government should go further with its promise of guidance, perhaps signposting the offer more clearly or implementing some form of compulsion to encourage consumers and get the best possible outcome.

As Andrew concludes, doing so would "ensure most people have a basic level of understanding of the myriad of options which are likely to become available before making any decisions."

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