Deciding how you will generate an income in later life is one of the most important aspects of retirement planning. Once you finish working and no longer have a regular salary, you’ll need to draw from other sources to fund your lifestyle.
You may take much of your income from your private and workplace pensions, and other savings such as those in an ISA. Your State Pension could be a valuable supplement to your other retirement savings too.
When preparing for retirement, you’ll need to consider when you can access these various sources of income. For instance, you can’t normally withdraw funds from a private or workplace pension until you’re 55 (rising to 57 from April 2028).
Currently, you can access your State Pension at age 66 but this is set to start increasing from 2026 onwards. It’s important that you consider this when planning for retirement.
Read on to learn more.
The full State Pension will be worth £11,973 a year in 2025/26
The State Pension pays regular payments for the rest of your life. What’s more, the amount you receive increases each year because of the “triple lock”.
This means that the State Pension amount rises by the higher of:
- Average wage growth
- The rate of inflation
- 2.5%.
In 2024/25, the full new State Pension amount is £221.20 a week (£11,502.40 a year). On 6 April 2025, the payments will increase by 4.1%, in line with average wage growth.
As a result, the full new State Pension will be worth £230.25 a week (£11,973 a year) in 2025/26.
Provided the triple lock stays in place, the State Pension amount will continue increasing annually, making it a significant part of your retirement income in later life.
For example, you might estimate your expenses will be £40,000 a year. In 2025/26, almost £12,000 of that could come from your State Pension, meaning you would take the other £28,000 from your other savings.
If you wanted to retire before you reach State Pension Age, you would have to draw the entire £40,000 from your own savings for a period until your State Pension payments started.
The State Pension Age will increase to 67 starting in 2026 and 68 from 2044 onwards
As life expectancy is rising and people may work later in life, the government decided to increase the age at which you can access your State Pension.
Anybody born between 6 October 1954 and 5 April 1960 starts receiving the new State Pension at age 66. For those born after this date, the State Pension Age will begin increasing in two stages.
There will be:
- A phased increase to 67 for those born on or after 6 April 1960
- A phased increase to 68 for those born on or after 5 April 1977.
Effectively, this means the State Pension Age will rise to 67 from 6 April 2026. The second phased increase will begin in 2044.
As the State Pension Age rises, you may have to draw a larger income from your own savings for two extra years – perhaps longer if there are more increases in the future – before your State Pension payments start.
At its 2025/26 level, you would need £23,946 to replace two years’ worth of State Pension payments. In the future, as the amount rises in line with the triple lock, you will likely need more than this.
It may be useful to think about how you could bridge this gap by increasing your own retirement savings.
Consider increasing your pension contributions
Increasing contributions to your private and workplace pensions could be a useful way to prepare for the State Pension Age increase.
When you pay into your pension, you typically benefit from 20% tax relief on your contributions. This means that a £100 contribution effectively “costs” you £80. You may be able to claim another 20% or 25% through self-assessment if you’re a higher- or additional-rate taxpayer.
The wealth in your pension is invested on your behalf and could grow over time. As a result, extra payments you make into your pension could be more valuable than contributions to other savings.
We can help you determine the level of savings you require to account for changes to the State Pension Age, and how much you need to increase your pension contributions by to achieve this.
Often, a small increase won’t make a large difference to your monthly income but could significantly boost your retirement pot. You’ll normally be able to access these funds from age 55, so you may be able to comfortably afford your living expenses before your State Pension payments start.
Bear in mind that you only receive tax relief on contributions up to your Annual Allowance. This is the total amount you can contribute to your pension each year without triggering an additional tax charge.
Build wealth in your ISAs
ISAs are an excellent tax-efficient option for retirement saving because you don’t pay Income Tax, Capital Gains Tax (CGT), or Dividend Tax on interest or returns you generate from wealth in an ISA.
Moreover, you don’t pay tax when withdrawing the funds either, making ISAs an effective solution for generating a tax-efficient income in retirement.
You can pay in up to £20,000 across all your ISAs in the 2024/25 tax year, continuing in 2025/26.
Using as much of this allowance as possible could help you build more tax-efficient savings for retirement, especially if you’ve already used your Annual Allowance for the year.
What’s more, you can access savings in an ISA at any age. This could be beneficial if you plan to retire earlier in life, before you can draw an income from your pensions.
Get in touch
We can help you adapt to any future changes to pension legislation.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate tax planning.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
Approved by the Openwork Partnership on 24/03/2025
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