The 33-year-old has been unable to recover from a shoulder injury sustained while representing Worcester Warriors against Bristol Rugby in March.
"I don’t feel ready to retire," said Sanderson.
"This is clearly a sad time for me as I feel that I have more to give - it is something that is still sinking in.
"It will take time for me to get used to the fact that I won’t be playing the game that has been so much more than a job for me over the last two decades."
The former back-row skippered England during the Churchill Cup in Canada in 2005 and the tour of Australia in 2006.