Retirement is one of the most significant milestones in your life. You’ve likely spent years building a fund suitable to support the next phase of your life, whether that involves travelling, taking up a new hobby, or simply spending more time with loved ones.
However, while it’s easy to focus solely on the amount you’ve saved, you may have overlooked how you’ll take an income from your savings.
Without a watertight plan, you may find you pay more tax than necessary on the money you’ve worked so hard to accumulate.
This has become increasingly relevant in recent years, as the new full State Pension now sits very close to the Personal Allowance.
If you’re eligible for the full new State Pension, this leaves you with little room before your other retirement income becomes taxable.
Thankfully, careful planning can help you make the most of your retirement savings while keeping your tax liability as minimal as possible.
Continue reading to learn how blending your retirement income can boost your efficiency.
Understanding how much you have could help you plan efficiently
Your pension wealth will likely form the bedrock of your retirement income, so it’s important to understand exactly what you might be entitled to when you stop working.
1. The State Pension
The State Pension is a guaranteed source of income that the government pays you when you reach State Pension Age. This stands at 66 in 2025/26, rising to 67 by 2028.
As of 2025/26, the full new State Pension offers £230.25 a week, or £11,973 a year.
While this likely won’t be enough to fund your entire retirement, it can help you cover day-to-day costs.
Just remember that you must have accrued 35 years of National Insurance contributions to receive the full amount, or 10 years to be eligible for any at all.
The “triple lock” also means that the State Pension rises each year in line with the highest of:
- Inflation (as measured by the Consumer Prices Index)
- Average wage growth
- 2.5%
For instance, the State Pension will rise by 4.8% in 2026, as average earnings were the highest of the above criteria.
2. The Personal Allowance
It’s also essential to understand the Personal Allowance, which is the amount of income you can receive each year without paying Income Tax.
For the 2025/26 tax year, this stands at £12,570. It is frozen at this level until 2031.
Since the new full State Pension is worth £11,973, very close to the value of the Personal Allowance, you only have a small margin before any income, such as pension drawdown, becomes taxable.
Knowing this could help you plan your withdrawals efficiently and avoid unnecessary tax.
3. Private pensions
Your private pensions are likely to be your most significant source of wealth in the next phase of your life.
You can usually withdraw the first 25% of your pension without incurring tax, up to the value of the Lump Sum Allowance. This stands at £268,275 in 2025/26. You can take this lump sum in one go, or in multiple withdrawals known as “drawdown”.
After you have taken your 25% tax-free cash, you will pay Income Tax at your marginal rate on everything you draw from your pension.
Understanding exactly how much your lump sum is worth, as well as your State Pension entitlement, could help you structure your withdrawals in a tax-efficient way.
Blending pensions and ISAs could reduce your tax liability
Even though your private pensions will likely form the bulk of your retirement income, using other sources of wealth strategically can help you minimise tax, while potentially making your savings last longer.
For instance, withdrawals from your ISAs typically don’t incur Income Tax or Capital Gains Tax.
So, blending these with pension drawdown could allow you to access the same monthly income while paying less tax.
There are also other practical allowances to help you minimise your tax liability. For instance, you can:
- Generate up to £7,500 a year without paying tax through the “Rent-a-Room scheme” by letting out a furnished room in your main home.
- Receive dividends from your investments – which are regular payments made from a company’s profits – within your £500 Dividend Allowance.
Structuring your withdrawals across multiple sources while making the most of your Personal Allowance and your tax-free lump sum could help keep your income efficient.
For example, if you took your full tax-free lump sum and then drew a further £2,000 a month from your pension, you could face around £2,286 in Income Tax each year. This is based on the 20% basic rate on earnings above the £12,570 Personal Allowance.
Instead, you could use a blended approach to keep your withdrawals tax-efficient by:
- Drawing £11,973 from your State Pension, combined with £597 from your personal pension, keeping you within the £12,570 Personal Allowance
- Taking £5,000 from your ISAs
- Rather than taking your lump sum all at once, you could access £6,430 from your pension as a tax-free element of a flexi-access drawdown.
This would bring your total annual income to £24,000, the same £2,000 a month, but with no Income Tax to pay.
A financial adviser could help you determine which withdrawal strategy might work best for your unique circumstances.
Setting goals could help you picture your ideal retirement lifestyle
Even with a well-structured plan, your retirement income might not necessarily align with your goals.
Knowing exactly how much you need each year could allow you to plan your withdrawals properly and prioritise any spending.
It’s a good idea to start by asking yourself:
- When do I want to retire?
- What will my monthly costs be?
- Do I want to travel?
- Will I offer financial support to loved ones?
- Do I still have debts, such as my mortgage?
- How much of my estate do I want to leave to my loved ones?
- Will I need to fund care?
Once you’ve answered these questions, a financial adviser could help you adapt them to your retirement plan.
They could do so by building a cashflow model which integrates variables such as inflation, investment performance, and unexpected events.
This could allow you to secure some much-needed clarity on how a blended approach could help you fund your dream lifestyle in retirement.
To find out more about how our team of independent financial advisers in Lewes can support you, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate tax planning, estate planning, or cashflow modelling.
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