Four Ways to Enhance Tax Efficiency in Your Retirement

Rising state pensions and frozen tax bands make it crucial to review the tax efficiency of your retirement income.

From 6 April, the weekly state pension increased to £230.25, which equates to roughly £11,970 annually; a 28% rise since April 2021.

While this boost is positive, it also means retirees may face higher income tax charges compared to previous years. This is largely due to the personal allowance, the amount of income you can earn tax-free, remaining at £12,570 for four consecutive years.

Likewise, the threshold for higher-rate tax remains fixed at £50,270.

Luckily, there are several strategies to potentially lower the tax you pay in retirement. These suggestions might not suit everyone, so speak to our advisers to see what works best for you. Here are some useful approaches to consider:

 

1. Withdraw Only What You Need

Since the state pension now takes up a larger portion of the personal allowance, the tax-free income you can draw from private pensions has decreased. Remember, you can typically take up to 25% of your pension pot tax-free (up to £268,275), with the remainder taxed as income.

Although tax should not dictate your lifestyle, it’s sensible to ensure you are not withdrawing more than necessary. Overdrawing can not only shorten the lifespan of your pension fund but may also result in avoidable tax liabilities.

Additionally, if extra income is placed in a cash savings account, returns exceeding your personal savings allowance and/or the starting rate for savings (see section 3 below) might be taxable. Keeping funds invested within your pension can allow for further tax-free growth.

 

2. Continue Using ISAs to Shelter Investments

Even if adding new money into an individual savings account (ISA) is not feasible post-retirement, existing ISAs remain a valuable way to protect investments from tax.

Within an ISA, investment growth, dividends, and interest income are free from income tax, and capital gains tax doesn’t apply when selling assets. By contrast, investing outside an ISA may incur taxes on dividends, interest, and gains.

If you hold investments in a general account, you might consider transferring these into an ISA through a process called ‘bed and ISA’.

Note that such transactions count towards your annual ISA allowance, currently set at £20,000 per year. Selling assets outside an ISA may trigger capital gains tax on profits exceeding the £3,000 CGT allowance for 2025-26. However, once inside an ISA, future income and gains are tax-free.

 

3. Explore Various Retirement Income Sources

Retirement income need not come exclusively from pensions. Using other savings or investments to supplement pension withdrawals can improve tax efficiency. Possible income sources include:

• ISAs: Withdrawals are tax-free with no limits.
• Savings Accounts: Basic-rate taxpayers can earn up to £1,000 interest tax-free annually (personal savings allowance), which reduces to £500 for higher-rate taxpayers and is £0 for additional-rate taxpayers. The ‘starting rate for savings’ allows up to £5,000 tax-free interest if other income is below £17,570.
• General Investment Accounts: You can earn up to £3,000 in capital gains and receive £500 in dividends tax-free during 2025-26.

How you sequence withdrawals from these accounts could make a big difference to your tax bill in retirement. Generally, drawing from general accounts before ISAs and pensions helps preserve tax benefits. However, personal circumstances vary, so seeking tailored advice is recommended.

 

4. Coordinate Financial Planning as a Couple

If you have a partner, joint financial planning often brings tax advantages. Couples effectively double their allowances; two personal allowances, two ISA allowances, and two capital gains tax allowances, and so on.

Maximising both partners’ allowances is a straightforward way to reduce overall tax liability.

Married couples and civil partners may also benefit from the marriage allowance, allowing one partner to transfer up to £1,260 of their unused personal allowance to the other, provided one earns less than £12,570 and the other pays basic-rate tax.

Additionally, spouses and civil partners can transfer investments without triggering tax, which can be beneficial if one pays higher-rate tax and the other basic-rate. Moving assets to the lower-rate taxpayer’s name can reduce or eliminate taxes on income and capital gains.

 

Get in Touch

Everyone’s retirement journey is unique. If you would like to explore how to make your income more tax efficient or need help reviewing your retirement strategy, our expert advisers are here to help.

Contact us today to arrange a conversation and take the next step with confidence.

Ramsbottom office: Email enquiries@rosebridgeltd.com or call 01204 300010
Chester office: Email enquirieschester@rosebridgeltd.com or call 01244 569141
Leeds office: Email enquiriesleeds@rosebridgeltd.com or call 0113 243 7100

 

Please Note

The Financial Conduct Authority does not regulate tax advice. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. This is for information only and does not constitute advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. The value of your investments can go down as well as up, so you could get back less than you invested.