Tax on spending takes an 18% bite out of the average retired households’ income which adds up to an annual bill of £29 billion, MetLife analysis of ONS data on household incomes shows.

The average retired household pays out around £4,100 a year in indirect taxes on spending which includes VAT, duty on alcohol and tobacco as well as fuel duty and taxes on betting and insurance premiums.

That equates to an annual tax on spending for the UK’s 7.12 million retired households equivalent to more than £29 billion.

VAT is the biggest contributor to the tax on spending with the average retired household contributing £1,865 in VAT a year – equivalent to around 8% of the average retired household’s income. Alcohol duties cost around £242 a year while fuel duty costs £262.

Tax on spending is a bigger burden for the less well-off – retired households ranked in the bottom tenth of the population for income lose nearly a third of their income to tax on spending.

The top tenth of retired households ranked on income pay out 14% in indirect taxes while their household incomes are as much as seven times higher than the bottom tenth.

Dominic Grinstead, managing director of MetLife UK, said: “Retiring from work unfortunately doesn’t mean retiring from paying tax, VAT and other indirect taxes on spending which take a major bite out of retired households’ incomes.

“The launch of pension freedoms has highlighted the issue of tax as many people rush to take their pension funds in full, risking unnecessary bills and providing further revenue for the government.

“People need certainty over income in retirement so that they can plan ahead and that should include looking at products which can provide a guaranteed income.”