You might have spent years diligently planning and saving for your retirement. Indeed, since auto-enrolment was introduced in 2012 – which requires employers to enrol eligible employees into a workplace pension scheme – we’ve become a nation of retirement savers.
Yet, you may not have given as much thought to how you’ll use your hard-earned pension pot when you leave work behind.
This transition from saving to spending – pension decumulation – requires careful planning if you want to make the most of your pension wealth and ensure it lasts the rest of your life.
However, a whitepaper by Standard Life suggests that many UK adults are at risk of “sleepwalking into retirement”. Moreover, 41% of retirees could be at high or medium risk of making poor decisions that may affect their financial wellbeing.
The government has recognised this need for greater support when it comes to pension decumulation. Its Pension Schemes Bill, which is expected to receive Royal Assent in 2026, places significant emphasis on the provision of choice and guidance to help savers create a sustainable income from their pension pots.
So, whether you’re nearing the end of your working life or planning further ahead, read on to learn how you can move seamlessly from saving to spending in retirement.
Understand your retirement income needs
Before you can start planning how to spend your pension wealth so that it lasts for your whole retirement, you must understand what your income needs are likely to be.
It might help to consider your:
- Retirement date – The earlier you stop working, the longer your pension wealth may need to stretch, depending on what other sources of income you have.
- Life expectancy – Of course, you can’t predict exactly how long you’ll live. However, tools such as the Office for National Statistics’ (ONS) life expectancy calculator could give you an idea of how long your retirement wealth may need to last.
- Preferred lifestyle – The Retirement Living Standards created by the Pensions and Lifetime Savings Association provide estimates of how much a minimum, moderate, and comfortable retirement might cost. You could use these as a starting point for calculating how much you might need to meet your specific goals and preferences.
- Retirement goals – In addition to your everyday costs, you’ll also need to factor in large expenses, such as travelling the world or funding your child’s wedding.
It’s likely that your income needs may change over time. For example, medical and care costs might arise later in life, or higher inflation could mean that it costs more to maintain your lifestyle. So, it’s important to keep your spending under review throughout your retirement.
Explore pension decumulation options
There are several different ways to manage decumulation.
- Annuities – You could use some or all of your pension pot to buy an annuity that will provide a guaranteed income for life or a fixed number of years. However, annuities typically offer less flexibility than alternative decumulation strategies.
- Drawdown – This allows you to make flexible withdrawals from your pension while the remaining funds stay invested. As a result, you could adapt how much income you withdraw in line with changes in your lifestyle, and any wealth left in your pension could potentially grow. However, there is also the risk that your invested funds may lose value.
- Lump sums – You might decide to take one or more lump sums from your pension when you retire. While this could help you cover large expenses, especially in early retirement when you might be eager to fulfil long-held ambitions, such as travel, there may be tax implications (more on this later).
You might want to combine several of these decumulation strategies to achieve your retirement goals. Indeed, each one offers different advantages and potential limitations. As such, you might find it beneficial to consult a financial planner who can explain the available options and help you explore which approach is best suited to your circumstances and objectives.
Plan how and when to make withdrawals tax-efficiently
In 2025/26, you can typically access your private pensions when you reach 55 (this will rise to 57 from April 2028).
While it might be tempting to dip into your pension wealth as soon as you’re eligible to do so – whether you’re still working or not – it’s important to understand the tax implications of making withdrawals. You can then plan how to spend your pension funds as tax-efficiently as possible.
Usually, you can only withdraw 25% of your pension pot without incurring tax. Any withdrawals above this amount are likely to be taxed as income at your marginal rate.
For example, if you’re a higher-rate taxpayer and you take half of your pension as a lump sum, only 25% will be tax-free. The other 25% will be taxed at 40% (2025/26).
So, as you can see, taking large amounts from your pension could mean that you lose a significant chunk of your carefully built savings in tax.
In contrast, if you only take what you need from your pension each year, you could spread your 25% tax-free amount over time.
Phasing withdrawals in this way could also help keep your income within the lower tax bands, depending on what other earnings you have. Moreover, the rest of your pension funds remain invested and could potentially grow.
Review your financial plan regularly
As mentioned above, it’s unlikely that your financial circumstances and income needs will remain static throughout your retirement.
Anything from a divorce or an illness to a change in the markets could mean that your financial plan needs tweaking.
That’s why meeting regularly with your financial planner to review your decumulation strategy is crucial. This could allow you to address potential financial shortfalls and capitalise on any unexpected windfalls so that you can enjoy the retirement you desire for as long as it lasts.
Get in touch
If you’d like help planning how to make the most of your pension wealth in retirement, our financial planners can provide the expertise and guidance you need.
Please get in touch by emailing info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can assist you.
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.
The Financial Conduct Authority does not regulate tax planning.
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. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
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