As you approach the end of your working life – whether you’ve built a business, advanced in a profession, or followed a different path entirely – the savings you’ve accumulated are a reflection of your commitment and dedication over the years. As you move into this next phase, the focus shifts from generating income to making smart, sustainable choices about how to use what you’ve built.
Let’s paint the picture: most people in the UK underfund their retirement to begin with, meaning their investments do not necessarily last as long as they would like them to. According to a recent study, almost 74% of Brits (both in the UK and abroad) are on course to fall short of retirement funds, showcasing the importance of saving effectively.
Retirement is a major life transition and, on top of that, these ‘golden years’ could span several decades. Without a salary or working income, most retirees will rely very heavily on their investments to fund day-to-day living. This means it’s essential to have a strategy that not only protects those assets, but helps them work as effectively as possible.
Making the most of your savings can mean the difference between simply getting by and fully enjoying the lifestyle you’ve worked hard to create. Whether your vision of retirement includes travelling the world, spending quality time with loved ones, diving into new hobbies, or giving back through volunteer work, achieving these goals comfortably requires a clear understanding of how to maximise your savings. Ultimately, the right strategy will depend on your individual goals, circumstances, and lifestyle – all of which can evolve over time. That’s why it’s important to review them regularly.
In this article, we’ll outline a series of straightforward, practical strategies to help you maximise your retirement savings – so your money can support both you and the lifestyle you’ve worked hard to achieve.
1. Cash: use it effectively, don’t erode your savings
At any stage of retirement planning, it’s important to maintain a cash reserve to cover essential living expenses, such as food, clothing and utilities. This cash pot should also be used to cover larger expenses like nearby holidays, and act as your emergency fund. It should always be held in easily accessible accounts to ensure ‘dry powder’ is available when needed.
It’s often tricky to estimate how much you might want to keep in cash at any given time (particularly as emergencies don’t tend to present their costs clearly in advance), but a frequently advised starting point would be making sure you have enough to cover from one to three years in easily accessible accounts.
Cash is clearly important, but it’s not something to depend on entirely. Striking the right balance between cash and investments is a vital part of retirement planning – yet it’s something many overlook, often with lasting consequences. Inflation erodes the purchasing power of cash, meaning your overall savings can dry up a lot faster if you are heavily exposed. Hence, it should primarily be used for short-term financial needs. Maintaining investments, even steady ones, alongside cash is essential to help your money keep pace with rising prices and preserve its value over time.
In this example, let’s compare two retirees, each with £145,900 in pension savings – the average for people aged 65–74 in the UK, according to the Office for National Statistics. The only difference is how they split their cash and investments, assuming cash grows at 2% per year, investments grow at 5.2% per year, no withdrawals are made, and inflation is not accounted for in the totals.
| Person | Cash held | Amount invested | Total value after 10 years* | Value gained |
| Sarah | £80,000 | £65,900 | £191,003 | +£45,103 |
| James | £30,000 | £115,900 | £222,146 | +£76,246 |
Based on this calculation, we can see that James would have gained a substantial £31,143 in savings over a 10-year period compared to Sarah. This, again, is assuming investments grow at 5.2%, which is in line with ARC indices ‘ARC Steady Asset Growth Portfolio’ from previous 10 years of data.
When it comes to the cash portion of your savings, seeking out competitive interest rates – particularly through savings accounts or Cash ISAs – can help you make the most of this low-risk allocation, while also taking advantage of tax-efficient options.
2. Drawing from general investments to reduce tax
Whilst ISAs and pensions provide a wrapper of safety from tax, general investment accounts don’t provide the same level of protection. For this reason, it’s often a smart idea to consider drawing from these accounts as your first port of call, although consideration should be given as to whether there is a resulting tax liability.
Doing so allows you to preserve the tax-free growth potential of your ISAs and pensions, while also helping to reduce the build-up of future taxable gains within your general investment portfolio. This is especially relevant now, given the successive reductions in the Capital Gains Tax (CGT) allowance and the tax increases announced in the October Budget.
Over time, this approach can lead to more efficient withdrawals and better long-term outcomes for your savings.
3. Tax-free lump sum: don’t take it if you don’t need it
It can be tempting to take your 25% tax-free Pension commencement lump sum (PCLS) as soon as it becomes available. After all, who doesn’t like the idea of a big, tax-free payout? But unless you have a clear need for the money, it might be wise to hold off. Taking the lump sum and letting it sit in cash could mean missing out on valuable investment growth.
If those funds stay invested within your pension, they can continue working for you in a tax-efficient way, potentially growing more than they would sitting in a bank account, likely being eroded by inflation. In short, just because you can take your lump sum early, doesn’t mean you should. Timing it to match your spending plans can make a real difference to how far your money goes in retirement.
4. Be aware of income tax bands
Instead of looking straight toward your pension to fund your retirement, a more effective approach is to consider drawing strategically from both ISAs and pensions. This coordinated approach can help to maximise your retirement savings while minimising tax.
The key benefit of ISA withdrawals is that they are completely free of tax, and so is 25% of your pension, whilst the remaining 75% of pension withdrawals are taxable as income. By blending income from both sources, you can make full use of your tax-free personal allowance and help stay within lower tax bands.
For example, consider someone who needs £25,000 per year in retirement. They could withdraw £10,000 from their ISA entirely tax-free, and take the remaining £15,000 from their pension as income (using Uncrystallised Funds Pension Lump Sums, or UFPLS). Of that pension withdrawal, 25% (£3,750) would be tax-free under pension rules, and the remaining £11,250 would fall within the income tax personal allowance of £12,570 (based on 2025/26 rates and assuming there is no other sources of income), meaning no income tax would be due. This structure provides £25,000 in income with zero tax paid, a simple way to make your savings go further.
If you require a higher income, say, £60,000 per year, then this strategy still holds value. You could take £50,270 from your pension and top it up with £9,730 from your ISA. The first £12,570 of pension income would be tax-free (under the personal allowance), and the remaining £37,700 would be taxed at the basic rate of 20%. The additional £9,730 from your ISA would again be tax-free, allowing you to access £60,000 while staying within the basic-rate tax band and avoiding the 40% higher-rate charge.
By carefully combining withdrawals from both ISAs and pensions, you can optimise the tax efficiency of your retirement income. This strategy allows you to make the most of your personal allowance, reduce or eliminate income tax liability, and avoid tipping into higher tax bands, ultimately giving your savings a lift and putting less of them in the hands of HMRC. Please remember that tax treatment depends on individual circumstances and may change in the future. You should seek personalised advice from a regulated financial adviser or tax professional before taking action.
5. Be aware of former tax relief
Tax efficiency isn’t just about how much you withdraw, it’s also about how and when you contributed these funds.
An ideal scenario would be contributing to your pension as a higher-rate taxpayer (and receive 40% or 45% tax relief), but drawing down as a basic-rate taxpayer in retirement (paying just 20% tax). This ensures you benefit from generous relief on the way in and lower tax on the way out.
Conversely, contributing at the basic rate and withdrawing at a higher rate is far less efficient, as due to income tax you’re probably more likely to receive less than you put in.
6. Drawing income strategically
A key yet often overlooked element of maximising your retirement savings is the order and amount in which you draw your income. Instead of withdrawing a fixed amount every year without review, consider adapting your withdrawal strategy based on market performance, tax efficiency, and your actual spending needs.
For instance, in years when your investments have performed well, it might make sense to take slightly more, provided you stay within tax thresholds.
Conversely, in years of weaker market returns, reducing your withdrawals can help preserve your portfolio’s longevity and give investments time to recover. This flexible, responsive approach, sometimes referred to as dynamic withdrawal strategy, helps reduce the risk of depleting your funds too early. A personalised, annual review with a financial adviser is key to aligning income with your lifestyle and market conditions.
7. Deferring your State pension
When you reach State pension age, you have the choice to delay taking your payments, which means you’ll get higher payments later on. If you don’t actively claim your state pension, it will automatically be deferred until you decide to claim it.
If you choose to defer your State Pension, it will increase by the equivalent of 1% for every 9 weeks you delay claiming it. This adds up to just under 5.8% for a full year of deferral. According to Gov.uk, that means you could receive around £13.35 more per week if you postpone taking your State Pension by one year.
So, if you don’t need to access your pension funds immediately and have other sources of income in retirement, deferring your State Pension – even for a short time – can help you make the most of it.
8. Maximising your beneficiaries inheritance
Before the latest budget, it generally made sense to leave your pension assets untouched for as long as possible. This is because pensions weren’t counted as part of your estate and could be passed on to your beneficiaries free from Inheritance Tax (IHT), unlike other investments.
From April 2027, under current proposals, pension assets may be included in your estate for IHT purposes. This change is not yet law and could be amended or reversed: always check for the latest updates and seek professional estate planning advice.
It’s important to be aware of this change, as it means pensions could face both Inheritance Tax and Income Tax when passed on to your beneficiaries, as the income tax will depend on their personal income. If you anticipate a longer retirement, it may be worth considering drawing from your pension earlier. This is because, if you pass away after the age of 75, your pension assets may be subject to both Inheritance Tax and Income Tax before reaching your beneficiaries. By contrast, if death occurs before 75, the assets can usually be passed on free of income tax.
The recent budget changes have led many people to look for more creative ways to reduce the impact of IHT. Common strategies include making gifts, using Potentially exempt transfers (PETs), or setting up trusts. These approaches can help reduce the size of your estate by gradually transferring assets to others during your lifetime. However, it’s important to understand the rules, such as the seven-year rule for gifts, to ensure your plans are effective and help your savings stretch further.
This article is provided for general information only and does not constitute personal financial advice. If you are unsure about the suitability of any investment or tax strategy, please contact a regulated financial adviser.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
