Financial Planning

How to reduce your tax liability in retirement

How to reduce your tax liability in retirement

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

After a long career paying taxes, it is understandable to want to reduce your liability as much as possible in retirement. Yet how can you ensure that your hard-earned money largely goes into your own pockets? In this guide, our financial planners at Cedar House offer six ideas to help save on needless taxes in retirement. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:

020 8366 4400 or


#1 Don’t rush

Pensions, ISAs and similar savings/investment vehicles let you continue to grow your money without paying tax. Anything held in an ISA, for instance, can generate capital gains, dividends and interest without liability – and you can contribute up to £20,000 to your ISA(s) each year.

When they can access it, many people rush to take out pension money and put it into a regular savings account. After all, this is what they are used to (with their salary). This may also feel “safer” than keeping your money in the stock market. 

However, doing this could jeapordise the longevity of your pension and misses out on the continued tax-free growth by keeping the funds invested.


#2 Prioritise your ISA

In the first years of retirement, think about first taking income (mainly) from your ISAs before your pension pots. Not only can you take funds from ISAs at any time (pensions cannot be accessed before age 55), but leftover pension pots can be handed down to beneficiaries, free from inheritance tax (IHT), on death. Since ISAs are not IHT-free, it often makes sense to use this money to fund your lifestyle, first.


#3 Use your tax-free lump sum strategically

After age 55 (rising to 57 in the future), you can usually withdraw up to 25% of your pension fund without paying tax. Simultaneously, you either have to buy an annuity or enter drawdown. 

Assuming you avoid triggering the Money Purchase Annual Allowance (MPAA) rules – covered below – you can keep working and contribute up to £40,000 per year into your pension (or, up to 100% of your earnings – whichever is higher). 

Be careful, however, to seek financial advice about your tax-free lump sum. Taking too much out could lower your quality of lifestyle in retirement, due to lower investment pension growth.


#4 Avoid the Higher Rate

Studies have suggested by 2026 another 1m people could be dragged into the Higher Rate of income tax (40%), including many people in retirement. This is due to several tax freezes (e.g. the income tax bands), which will push wages into more punitive tax brackets as average wages rise each year. 

For those using drawdown, be careful not to withdraw too much from your pension pots within a single tax year. If you think you will need more than £50,000 annually to fund your lifestyle, then consider speaking to a financial adviser about how you could reduce your liability. 

One idea may be to use your tax-free dividend allowance (£2,000 per year) to help fund some of your discretionary spending. 


#5 Avoid the MPAA before time

The MPAA rules mentioned above can be triggered, often inadvertently, through actions such as accessing certain pension benefits whilst continuing in paid work (also continuing to contribute to your pension). The MPAA reduces your annual allowance to £4,000. 

For some, this could represent a 90% reduction in what they can put into their pension each year. It is crucial, therefore, that you do not activate the MPAA before you are ready – as this can severely undermine your ability to keep saving for retirement. 


#6 Plan with your partner

For those who are married or in a civil partnership, it is important to remember that each of you is taxed separately on your own pension incomes. Your overall household income is not taxed. This opens the door to make further savings in retirement, with some careful planning.

Since you both can earn up to £50,000 per year without paying the Higher Rate, this means you could have a combined annual pension income of £100,000 – without facing 40% income tax – if you organise your finances correctly, well ahead of time. 

For instance, rather than focusing on just building up one person’s pension(s), you could help each other to build both of your pensions. A good starting point is your two State Pensions. In 2022-23, the full new State Pension provides £185.15 per week, which is £9,627.8 per year. Multiplied by two, this is £19,255.6 of guaranteed, lifetime income in retirement which will rise each year by at least 2.5% (under the “triple lock system”).

You could also both work together to build up your own pension savings. For wealthier couples, this can help you avoid exceeding the Lifetime Allowance (the total “cap” on an individual’s pension savings) of £1,073,100 – since you each get your own. 

With all of this said, you both also need to think about your future IHT liability. Married couples and civil partners can pass any unused IHT allowance, tax-free, when they die. However, there may still be an IHT bill due when the second person dies. A financial adviser can help you craft a wise estate plan, to ensure a good legacy is left for your loved ones.



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

020 8366 4400 or


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