How a retirement income plan could save you £1,000s

You might assume that drawing a retirement income is simply a matter of withdrawing what you need each month from your pension.

While it can be that straightforward, doing so without a plan could mean you pay far more tax than necessary.

Having a structured retirement income plan that comprises multiple sources can help ensure your money lasts and supports your goals, while keeping your withdrawals as tax-efficient as possible.

Read on to find out how to create a retirement income plan that could save you thousands of pounds in tax each year.

Having a clear picture of what you’ll need in retirement is the foundation of your plan

Your goals are the foundation of your retirement income plan as they determine how much you’ll need to achieve your ideal lifestyle.

While you don’t have to be certain about everything, you may want to consider the following questions to get a clearer picture of what your retirement will look like:

• When’s your ideal retirement date?

• What is your essential expenditure likely to be each month?

• What major trips or experiences do you want to do?

• How much financial support will you provide to family and loved ones?

• Are there any significant debts, such as a mortgage, that you still need to clear?

• How much of your estate do you want to leave as a legacy?

• What if you need care?

• What will happen if there is a market crash?

Once your goals are clear, a financial planner can help you find estimates for what you’ll need to achieve them. They can also factor in elements outside your control, such as care costs, inflation, or market downturns, to build a plan that is ready for future challenges.

By using cashflow modelling, a financial planner can create different projections of your income, spending, and savings over time. This can provide a clear picture of how various decisions, life events, or external factors may impact your long-term financial security and retirement income needs.

Understanding your pension entitlements is important for making tax-free withdrawals

Your pensions are likely to be your most significant income source in retirement, so understanding your entitlements is important for keeping your withdrawals as efficient as possible.

Start by checking your State Pension forecast to see how much you’re likely to receive and when the payments will begin. This will help you understand how much of your Personal Allowance may be covered by the State Pension alone.

In the 2025/26 tax year, the full State Pension is £11,973, while the Personal Allowance is £12,570. With the State Pension and Personal Allowance so close in value, it’s important to try to ensure your other income sources are efficient.

Next, review any workplace or private pensions you have. Remember, you can typically withdraw 25% of your pension tax-free, up to the Lump Sum Allowance of £268,275 (2025/26). You can either take the tax-free portion as a lump sum or receive it gradually through drawdown.

If you draw from your tax-free lump sum and it takes you above the Personal Allowance, you won’t pay Income Tax. However, if you’ve already withdrawn your lump sum, you will pay Income Tax at the standard rates.

So, understanding your projected State Pension, other pension pots, and your 25% tax-free lump sum can help you structure your withdrawals efficiently throughout retirement. This could reduce unnecessary taxes and make your income last longer.

Drawing on ISA savings alongside your pension can improve your efficiency

Combining pension withdrawals with ISA savings can help to minimise your tax liability and make your retirement savings last.

For example, if you were to draw £2,000 a month solely from your pension after taking your tax-free lump sum, you could face around £2,284 in Income Tax each year. This is based on you paying the 20% basic rate on your earnings over the Personal Allowance.

However, by blending your pension and ISAs and using drawdown strategically, it’s possible to receive the same £2,000 a month without paying any tax.

One approach might be to take:

• £12,570 within your Personal Allowance (£11,973 of State Pension combined with £597 from your personal pension pot)

• £5,000 from your ISAs

• £6,430 from your pension as part of your tax-free drawdown.

By planning your pension withdrawals, combining them with other efficient income sources, and making full use of your allowances, you can help keep your income tax-efficient and save thousands each year.

Regularly reviewing your plan helps ensure it remains efficient

Regularly reviewing your retirement income plan helps to keep it aligned with your goals, spending habits, and market conditions. Life events, unexpected expenses, shifts in investment performance, or changes in inflation can all affect your financial position in retirement.

By reviewing your plan every 6 to 12 months, you can adjust your withdrawals to help keep your income efficient and ensure your goals remain achievable over the long term.

Get in touch

We can support you at every stage of creating your retirement income plan.

From setting your financial targets to reviewing your pensions and other savings, we’ll work with you to build a clear strategy that maximises efficiency while keeping your retirement goals at the heart of the plan.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

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.

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.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.