Maximise Your Retirement Savings: How to Pay Less Tax in Retirement

As retirement approaches, many UK workers are faced with the prospect of higher tax rates. The Office for Budget Responsibility (OBR) predicts that by 2027/28, 2.5 million workers will fall into higher and additional tax brackets. This means that more of their hard-earned income will be subject to tax.

Furthermore, the tax burden for retirees is also on the rise. The OBR estimates that there will be 8.1 million taxpayers of State Pension age in the tax year 2023/24, compared to 6.47 million in 2020/21. This represents a significant 25% increase in just three years.

However, there is a way for retirees to be more proactive in reducing their tax burden and maximising their retirement savings. Today’s Daily Record explains how, by understanding their tax exemptions and making use of tax-efficient savings vehicles like ISAs, retirees can ensure that their retirement assets and income are not needlessly depleted by taxes.

Maximising Exemptions – The ‘Tax-Free Max’ in 2023/24

In the current tax year, UK residents can receive up to £26,570 from potentially taxable sources without paying any tax. This includes income from work or pensions, savings interest, dividends, and capital gains. It’s important to note that in order to maximise these exemptions, significant savings and investments are required.

Gary Smith, a Partner in Financial Planning at wealth management firm Evelyn Partners, suggests that retirees can enjoy an annual income of £27,227 without paying any tax at all by carefully structuring their finances.

Personal Tax Allowance

For individuals in retirement who receive the full state pension of £10,600 per year, they can also receive a private pension income (from an annuity, for example) of £1,970 per year before hitting the personal tax allowance of £12,570. This means that they can add to their retirement income without incurring additional tax.

Pension Tax-Free ‘Lump Sum’

Contrary to common perception, the 25% tax-free lump sum from a private pension pot does not have to be taken all at once. Instead, as income is withdrawn from the pot each year, 25% of each withdrawal can be taken tax-free. This approach can help minimise the overall tax burden. For example, an individual who wishes to pay no tax from their pension withdrawal could set their annual withdrawal at £2,627 gross. Of this amount, 75% falls within the personal income tax allowance, while the remaining 25% is tax-free.

Savings Income

If retirees have significant savings outside of ISAs, they can benefit from the starting rate of tax for savings, which is £5,000 as long as it doesn’t exceed the personal tax allowance of £12,570. Additionally, the personal savings allowance of £1,000 for basic rate taxpayers means that there is potentially £6,000 of tax-free interest income available.

Investment Income and Capital Gains

From a non-ISA investment portfolio, retirees can also draw income from dividends up to £1,000 and capital gains up to £6,000, all of which can be tax-free. However, it’s important to note that these allowances have recently been reduced and are set to decrease even further in the future.


Finally, retirees can earn up to £1,000 tax-free from casual trading, such as buying and selling on internet trading sites like eBay, thanks to the trading allowance.

Gary Smith emphasizes that couples can double most of these tax-free amounts by using both sets of allowances. The transfer of assets between married couples and those in civil partnerships does not trigger tax liabilities, providing flexibility to achieve tax efficiency.

The Importance of Pensions and ISAs

Pensions offer an attractive tax benefit for retirement savings. In addition to the 25% tax-free lump sum, a drawdown strategy can be calculated to keep annual income below the tax thresholds, whether that is the basic, higher, or additional rate bands.

Gary Smith explains that the tax benefits of pension relief at the contribution stage often outweigh the tax paid at access, even for those who withdraw taxable amounts. This is particularly true for individuals who received tax relief on their pension contributions at a higher or additional rate. They may then pay tax at a lower rate when they access their pension income.

Furthermore, pension savers also benefit from investment growth, as investment returns are earned from gross contributions. However, it’s worth noting that due to the growth of a pension pot, more tax may be paid when funds are accessed.

By understanding and utilizing the various tax exemptions and allowances available, retirees can reduce their tax burden and ensure that their retirement savings go further. Maximizing the use of tax shelters, such as ISAs, and structuring pension access can also provide further protection against rising taxation. It’s important for individuals to seek professional financial advice to make the most of these opportunities and ensure a secure financial future in retirement.