5 clever ways to make your retirement income last

Category: News

Even with a large enough pension pot to provide your dream lifestyle for the rest of your life, the decumulation stage of retirement is a constant juggling act of budgeting and money management.

Whether you’re balancing cash versus investments, timing and ordering pension withdrawals, or making memories without damaging the legacy you leave behind, there’s a lot to think about. That’s why we’re on hand to help.

Keep reading for five simple ways to make your retirement income work for you.

1. Keep an emergency fund in cash, but don’t hold too much

The unexpected can strike at any time, so it’s important to maintain an emergency fund, even in retirement. A rainy day fund equal to around six months of household expenditure should be sufficient to cover unplanned expenses.

Keeping this amount in an easy access savings account is vital to ensure the money is there when you need it, but holding too much in cash can be damaging.

When inflation is higher than your bank’s interest rate, your cash fund is effectively losing value in real terms. Check in with your emergency fund regularly to ensure it is still fit for purpose, and be wary when withdrawing pension funds.

Take out only what you need. If you take out too much or withdraw funds too early, the cash could sit in your high street bank account and lose spending power over time. Funds that remain invested, meanwhile, still have the chance to grow.

2. Pensions and ISAs shelter your fund from tax, so prioritise withdrawals from elsewhere

Your retirement income doesn’t have to come from the pensions you hold.

Pensions and ISAs provide a tax-efficient environment, so it makes sense to keep your money in these wrappers until you need it.

Think about the retirement income you withdraw – whether from pension funds or elsewhere – and the tax efficiency of those withdrawals. You might, for example, take money out of general investment accounts first.

Leaving ISA and pension funds in a tax-efficient environment until later in retirement should give them longer to grow.

Note: It’s also worth bearing in mind upcoming changes to Inheritance Tax (IHT) and pension rules (see point 5 below).

3. Thinking about the timing and order of withdrawals can help keep your tax bill down

ISA withdrawals are free of both Income Tax and Capital Gains Tax, while 25% of your pension can usually be taken tax-free. The remaining 75% of your pension is taxed as income at the highest rate you pay, so think carefully about the size and timing of withdrawals.

Drawing down a large portion of taxable income could leave you with a hefty bill or even move you into a higher bracket.

Consider withdrawing a mixture of ISA and pension funds, and if you need to make a large withdrawal, think about timing it to fall either side of a tax year, giving your allowances a chance to reset.

4. Deferring your State Pension until you need it will increase the amount you receive

The State Pension Age is currently 66, rising to 67 between 2026 and 2028 (and to 68, starting from 2044). You don’t receive the State Pension automatically, though. You have to apply for it.

Opt not to do so, and you effectively defer it until a later date. Deferring increases the amount you eventually receive, so it can be a great option if you reach State Pension Age but still have a steady income.

If you reached State Pension Age on or after 6 April 2016, and defer for at least nine weeks, your State Pension amount will increase by 1% for every nine weeks you defer (around 5.8% a year).

Once you start to receive your State Pension, the extra amount will be added to each payment. According to the government’s website, a one-year deferral could boost your State Pension income by £13.35 a week.

The full new State Pension in 2026/27 will be around £241 a week (or £12,535 a year).

5. Consider the impact of Inheritance Tax pension changes on your estate planning

Back in December 2024, we wrote about Rachel Reeves’ proposed changes to the Inheritance Tax (IHT) treatment of unused pension amounts, due to come into force from 2027. Currently, these funds fall outside the scope of IHT, but this will no longer be the case once the change takes effect.

While the new rules are still some way off and there’s certainly no need to panic, it is worth revisiting your estate and legacy planning – and we can help with that.

There are several strategies you might adopt – from using your retirement income to make memories, to giving while living to reduce the value of your estate (and so any potential IHT liability), to moving pension funds into trusts. The best option for you will depend on your circumstances, so get in touch and we can help answer any questions you have.

Get in touch

Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans and ensure your pension fund works hard for you throughout your retirement.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. 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.

Workplace pensions are regulated by The Pensions Regulator.

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