The retirement income adviser for life and pension provider Prudential said that, too often, people approaching retirement did not take into account the fact they would still pay tax on their yearly income.
He said: “Retiring from work doesn’t mean that you are retiring from paying tax. Whether you are liable for income tax or are paying VAT on your purchases, the contributions you make to the exchequer will continue throughout your retirement.”
According to figures from Prudential, the average retired household pays out 30 per cent of its annual income in a combination of direct and indirect taxes.
Analysis of data from the Office for National Statistics showed that in the 2011-2012 tax year, the average retired household paid £6,400 in tax from a gross income of £21,300.
That equates to a total of £45.6bn paid in taxes by all retired households, whether through VAT or income tax, council tax and other taxes, such as tobacco and petrol.
Mr Russell added: “The changes to pensions and how people can take their retirement income announced in the Budget last month will provide savers and retirees with more choices and will affect the way that tax is applied.
“Irrespective of these changes, 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.”
Jo Jackson, financial planner at London-based Brewin Dolphin wealth management, said: “Although the much maligned annuity has taken another blow to its already tarnished reputation, it does, however, remain one of the few solutions that offer a guaranteed income for life, which is a feature many still appreciate.
“The retirement landscape is changing and, therefore, using part of your pension fund to purchase an annuity could provide peace of mind that one’s day-to-day expenditure is covered by some level of guaranteed income.”