As the end of the tax year looms, equity release adviser Key has established that retired households lose almost 14% of their income a year to direct taxes.

Key’s analysis of latest government data found that income tax and council tax take 13.9% off the average retired household’s pre-tax income of £31,674. Retirees around £4,078 a year in direct taxes or around £45.278 billion in total.

The data shows that benefits contribute around two-fifths – nearly £13,000 a year – of the average retired household’s pre-tax income with most of that coming from the State Pension and the rest from a range of other benefits including Disability Living Allowance and Housing Benefit.

The analysis shows average disposable incomes for retired people fell in the financial year ending 2020 from the previous year by nearly 12% with much of the cut coming from lower private pension income and investment income. Retired households on average received £12,102 from private pensions in 2020 compared with £14,756 previously while investment income dropped from £2,933 to £2,084.

Key also revealed that the wealthiest 10% of retired households pay £14,680 a year in direct taxes – the equivalent of 19% on their gross incomes of nearly £77,000.

Will Hale, CEO at Key, said: “While national insurance contributions cease when you retire, you still need to pay income tax and council tax so it pays to budget for these bills as part of your retirement planning. If you haven’t accounted for tax within your budgeting, losing almost 14% of your household income can have a significant impact on your standard of living throughout retirement.

“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.”