You might have built up your retirement pot over the years in lots of places like pensions, savings accounts and ISAs.
No matter where they are though you will have to make wise decisions to make sure it lasts for the rest of your life.
Here’s a closer look at what options you have and how to take a tax-efficient income in retirement.
This article isn't personal advice. If you're not sure whether an investment is right for you, ask for financial advice. Unlike cash, all investments and any income from them can fall as well as rise in value, so you could get back less than you invest. Tax rules can change in the future and any benefits depend on your circumstances.
What you do with your pension is an important decision. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help you and we can offer you advice if you'd like it.
Think of a strategy for taking an income
If you want an income from your pension and need it to last for the long term, you might want to consider the natural income strategy.
This is where you only take the income that your investments produce, like dividends. It’s often referred to as the ‘natural yield’.
But this might not always be enough to meet your needs.
So, you can choose to sell your investments and make withdrawals from your capital, but remember, withdrawals from capital could reduce the value of your investments.
What are your options to take a tax-efficient income in retirement?
Use ISAs to boost your retirement income
With pensions, 75% of the value will normally be taxable as income when you access it. The rate of tax you pay will depend on what tax band you’re in when you withdraw.
However, you don’t pay income tax on cash and investments in an ISA.
For this reason, you could look at taking money from an ISA before your pension or vice versa. It largely depends on your retirement income needs, and tax position, when you make any withdrawals though.
It can be a good idea to mix withdrawals from both your ISA and pension – for example, if you’re planning to receive an income which is more than £50,270.
As any withdrawals you make from your ISA aren’t income for tax purposes, by balancing your withdrawals from your ISA and pension you might be able to stay below the higher-rate tax band.
Just remember, if you have a Lifetime ISA, withdrawals will only usually be tax free if used for an eligible house purchase or from age 60.
Accessing money from your pension pot
You can access most personal pensions from age 55 (rising to 57 in 2028), but if you can afford to wait, there are advantages in doing so. You can normally take up to 25% of your pension tax free, with the rest taxed as income.
Before you access your tax-free cash, you should consider how much you really need.
It can be tempting to just take the 25% in one go. But if you can afford to do so, you can opt to take your tax-free cash allowance in stages.
One way you can do this is by moving portions of your pension into drawdown, taking up to 25% of that amount, and leaving the rest invested. Just make sure you’re happy with the risks of investing.
With drawdown, you choose where and how to invest, so you’re in control of the money in your pension. Make sure your drawdown strategy is aligned to your financial goals and your overall attitude towards risk.
Consider buying an annuity in retirement
You could consider using some of your pension to buy an annuity to make sure your essential costs are covered.
With an annuity you won’t have to worry about the ups and downs of the stock market. You’ll receive a secure income for the rest of your life.
You can buy an annuity even if your pension’s already in drawdown, and you’ll have peace of mind that you’ll get a guaranteed income, no matter what the markets are doing.
Consider your options carefully though, as once set up, annuities cannot usually be changed.
Have a plan for your tax-free cash
Everyone should have an emergency fund. If you’re still working, you should have around three to six months’ worth of essential spending. If you’re retired, you should hold more – around one to three years’ worth.
You should think about holding your emergency cash fund, or any excess tax-free cash, in a higher-interest savings product.
That way your money can earn interest with less risk than if it were invested in the stock market. You don’t need to hold everything in the same account.
You could consider holding your emergency fund in an easy-to-access bank account. And for money you don’t need right away, you could choose a fixed-term account. Just remember, once it’s fixed, you can’t take the money out until the term ends.
You could also consider holding some in Cash ISAs to make the most of interest rates on offer and tax-efficient savings options.
If the thought of scouring comparison tables for good deals fills you with dread, savings platforms, like Active Savings, make it easier by bringing great rates from multiple banks in one place all online.
Remember, inflation reduces the future spending power of cash.
Need more help? – Get advice on your retirement plans
Retirement is a time when you might feel unsure about what to do with your money and need help to make decisions.
Our financial advisers can work with you to plan your retirement income strategy. They can also make sure your investments match your goals and give you advice on when and how to take an income.
New to HL?
Join the UK's no.1 investment and savings platform
The only home for your pensions, savings and investments.
Already an HL client?
Make the most of your allowances before 5 April.
Top up your account online in minutes by logging into your account.
Before adding money do check in on your ISA and pension allowances for the tax year and read our key features online
Our latest offers
Checkout some of our special offers that could give you more value for your money. Terms apply.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).