The average retired household pays an astonishing £6,500 a year in tax: that's enough to buy a cheap car and still keep £500 aside for the running costs. Many have no idea they are forking out such a shocking amount in tax, because three fifths of this is hidden in indirect taxes.
The figures have been released by Prudential, which revealed that pensioners pay a combined total of £47.26 billion a year in tax. They also highlight that it's difficult for pensioners to do much about this, because two thirds of the tax is 'indirect taxation' including things like road tax, duties on petrol, alcohol and tobacco, and VAT.
The lion's share of it is taken up by VAT - which accounts for 8.2% of the average retired household's income.
What can you do?
The other third is made up from direct taxes like income tax and council tax, which is where cuts can more easily be made.
This year, the first £10,500 you receive in income is free of income tax. If one of you earns more than this, and the other earns less, you can save money by transferring savings into the name of the non-tax-paying spouse. Any income from these savings will then fall into their tax-free allowance, and they don't have to pay tax on it.
Prudential warned that the direct tax figure would be even higher this year because much of the money released as a result of pension freedoms would be taxed. The Treasury estimated that the new rules would generate £320 million more tax from pensions in their first year.
Stan Russell, retirement income expert at Prudential, said: "The new pension rules that came into effect this April give savers and retirees more choices and greater flexibility over how they take their income. But there is a risk that people could end up paying more tax than they expected which, with careful planning, they might be able to avoid."
He recommended getting advice, or using the Pensions Wise service, to understand how much tax you will face, and get help finding a way to pay less tax. He added that it was "A stark reminder that not all the income you receive in retirement will be yours to spend as you like." So it's also essential to consider the effect of tax when making plans for retirement.
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