How to use the state pension in retirement

Pensions and retirement
Views & insights

Discover how the state pension works and how it could complement income from other pensions and investments in retirement.


13 June 2024 | 3 minute read

The state pension alone is unlikely to be sufficient to fund what most people would deem a comfortable retirement, but it could make up a meaningful portion of your overall retirement income. It’s therefore worth taking the time to understand how the state pension works, and how it could complement income from your other pensions and investments.

Arming yourself with the right knowledge could even help you pay less tax, meaning you have more money to put towards enjoying your retirement or pass on to future generations.

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State pension – what you need to know

The state pension is worth £221.20 a week (2024/25 tax year), which works out at around £11,500 a year. The state pension age is currently 66, but will rise gradually for those born on or after 6 April 1960, eventually increasing to 68 for those born on or after 6 April 1978.

You need 35 years of national insurance (NI) contributions or credits to receive the full state pension. It might be possible to fill gaps in your NI record by paying voluntary contributions, which could increase your state pension entitlement.

If you’re still working and paying tax when you reach state pension age, it might be worth deferring your state pension, especially if you don’t need the money. The state pension will increase by 1% for every nine weeks you defer. This works out as just under 5.8% every year.

Will the state pension be enough?

According to the Pensions and Lifetime Savings Association1, a comfortable retirement costs £43,100 a year after tax, which is £31,600 more than the current state pension. That might seem like a big shortfall, but it does mean that over a quarter of your retirement income could come from the state pension. That’s not to be scoffed at.

For some, an annual income of £43,100 will be plenty, but for others it won’t cover all their expenses. By running through your expenditure and lifestyle goals, we can help you understand what ‘comfortable’ means for you and give you a clear picture of how much you really need in retirement.

How can I use the state pension as part of my retirement planning?

If you want to retire before state pension age, you’ll probably need to rely on other income sources to meet your needs. This might mean taking higher withdrawals from personal pensions to cover that period, and then reducing your withdrawals when the state pension becomes payable.    

When the state pension kicks in, it might help to view it as a source of funds for your essential expenditure. This is because the state pension is a guaranteed income for life. You could then view your personal pensions and savings pots as a source of funds for discretionary spending, such as holidays and meals out. Doing so could help you budget better, particularly when it comes to life’s little luxuries.

Can I make my retirement income more tax efficient?

Understanding how different savings and investment pots are taxed could help you generate a more tax-efficient income in retirement.

When you access a defined contribution pension, the first 25% (which is capped at £268,275 for most people) is usually tax-free and the rest is taxed at your marginal rate of income tax. You also have a tax-free personal allowance, which is the amount of income you can earn each year before paying tax. For the 2024/25 tax year, the personal allowance is £12,570.

The state pension counts towards your personal allowance and uses most of it up. Once you’ve started receiving your state pension, you’ll therefore be taxed on the lion’s share of personal pension withdrawals. An alternative option is to focus on drawing income from ISAs instead of personal pensions. Although ISAs don’t provide tax relief on contributions like pensions do, any withdrawals from them are completely tax free2.

It’s a bit different if you retire earlier than the state pension age. If, for example, you retire at age 60 and draw all your income from ISAs and nothing from pensions, your personal allowance would effectively be wasted. Over time, this could result in a bigger-than-expected tax bill, as this article demonstrates.

Next steps

Knowing how to structure your income in retirement isn’t straightforward. The solution that’s right for you will depend on a range of factors, including when you retire, and how much you’ve built up in different savings and investment pots. We can advise on how to draw income in a tax-efficient and sustainable way, so that you feel more confident that your retirement savings will go the distance. We can also help you keep up to date with changes to the state pension and explain how those changes may affect you and your plans.
Some types of ISA apply a tax charge if money is withdrawn and used for non-approved purposes.

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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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