UK retirement & tax guide

UK pension types — what you've actually got

When people say "my pension", they usually mean one of three completely different things. The same word covers a state-paid flat amount you're entitled to from the government, a pot of money you've built up through work or your own contributions, and (for some lucky public-sector workers) a guaranteed income for life based on years of service. The planner treats these three streams separately because the rules around each are different — and they hit your bank account at different ages.

Tax in retirement — the bit that surprises people

The mistake most people make: they look at their pension pot, divide by years they want it to last, and assume that's their income. It isn't — HMRC takes a slice. State Pension, DB pension, and pension drawdown all count as taxable income and they combine into one annual figure before bands apply. So a "£40k retirement" isn't £40k in your pocket; it's £40k gross, taxed roughly the same way as a salary.

The good news: ISA, cash, and the "Other" pot are tax-free on the way out, so a clever drawdown order can keep you well inside basic rate even when your gross looks higher. The Withdrawal strategy section below is where that lever lives.

How the bands stack

• State Pension + DB pension + DC drawdown all combine into one annual taxable income
• Personal Allowance £12,570 → Basic rate 20% up to £50,270 total income → Higher rate 40% up to £125,140 → Additional rate 45% above
• Personal Allowance taper above £100k applied at £1 per £2; PA fully gone at £125,140
• Scottish residence available — six bands (starter 19% / basic 20% / intermediate 21% / higher 42% / advanced 45% / top 48%)
• Pension drawdown is grossed up so the net received fills the gap left after netting State Pension and DB
• State Pension and DB share their portion of the base tax pro-rata

Walk-through: what £4,000/month net actually costs in tax

Imagine you're 70, drawing State Pension (£12,548/yr) and want £48,000 net for the year (£48,000). Here's how the engine fills the gap:

1. State Pension arrives gross at £12,548/yr. It's taxable, but the first £12,570 of total income is tax-free (your Personal Allowance), so most of it lands in your bank untaxed.
2. That leaves a gap of roughly £35,452 net to find from your other pots.
3. If the planner draws that from your ISA, the tax bill stays at £0 — ISA withdrawals don't count as income at all. Net delivered: £48k. Job done.
4. If instead the planner draws from pension, it has to gross-up: pull out enough so that what's left after tax equals the £35,452 you needed. With State Pension already using your Personal Allowance, every pension £ falls into basic rate — about 20% tax drag on the gap. The pot has to give up around £44,316 gross to deliver £35,452 net. That's where the "blended rate" you see on the age breakdown comes from.

Same target spend, two paths, very different annual tax bills. Multiply that across 30 years of retirement and the numbers start to matter.

What this planner does NOT model

These are documented simplifications. Each is real HMRC (His Majesty's Revenue and Customs) behaviour the model ignores; if any is load-bearing for your decision, seek advice or run the numbers manually.

• Tapered Annual Allowance (AA) for adjusted income above £260,000 — the headline £60k AA reduces toward £10k as income rises. Not enforced by the model.
• Money Purchase Annual Allowance (MPAA) enforcement. The model DETECTS the MPAA trigger event when you take taxable pension income, but does not enforce the £10k contribution cap during accumulation because the engine ends contributions at retirement by default.
• Carry-forward of unused Annual Allowance from prior 3 years. High one-off contributions (bonus years) are simply hard-capped at £60k.
• Per-spouse separate tax computation in drawdown. Couples still use a doubled household band — accurate when spouses' incomes are symmetric, increasingly wrong as they diverge. Note: per-individual Annual Allowance and ISA (Individual Savings Account) caps ARE enforced separately.
• National Insurance (NI) during retirement. Drawdown isn't NI-able, so this is correct for retirement, but during accumulation we don't model employee NI deduction from disposable income (we DO model salary sacrifice NI saving as an additional pension credit).
• Capital Gains Tax (CGT) / dividend tax on the Other pot. The Other pot (GIA — General Investment Account — crypto, gold) is treated as tax-free for simplicity. Real GIAs attract CGT and dividend tax.
• Inheritance Tax on the estate, including the April 2027 change that brings DC (Defined Contribution) pensions into the estate.
• LTA (Lifetime Allowance) -protected higher PCLS (Pension Commencement Lump Sum) caps (Fixed Protection 2016, Individual Protection 2014/16, etc.) — model uses the standard £268,275 cap.
• Welsh income tax — uses rUK (rest of UK) rates (currently the same as English / Northern Ireland, but Wales has separate-rate-setting power that could diverge).
• Defined-benefit pension accrual. A monthly DB figure is an input, not an outcome — the planner doesn't simulate years of accrual against scheme rules.

ISAs — your tax-free side pot

Think of an ISA as the bridge between your cash account and your pension. You can pay in up to £20,000 a year (per person), it grows tax-free, and you can take it out at any age with no tax to pay — no minimum age, no annual limit on withdrawals, no paperwork. That makes it the perfect bridge if you want to retire before pension access age (currently 55, rising to 57 in April 2028) or to cushion a "bad returns" year so you don't have to crystallise pension losses.

The planner uses one ISA balance with one return rate, and you imply the underlying mix by the return % you enter:

Your plan's ISA real return is 2%/yr (less 0.25% fee). Starting balance: £50,000.

Your plan's ISA annual subscription limit is £20,000/tax year (UK statutory cap is £20,000 across all ISAs combined). The model enforces this — anything routed to ISA above the cap (monthly contribs, downsize equity, tax-free pension cash) overflows automatically to Cash.

Other investments — when you've maxed the wrappers

If you're already paying the full £20k a year into ISA and contributing to your pension, where does extra money go? Anywhere outside the tax-protected wrappers — and that's what the "Other" pot represents. It's a simplification: the planner treats it as tax-free for the projection, but in real life HMRC taxes Capital Gains and dividends in this bucket. If a big slice of your wealth lives here, take the projection's "Other" income with a pinch of salt and budget for ~10–20% tax drag on top.

Typical things people hold in Other:

• GIA stocks / ETFs (Exchange-Traded Funds) / funds — held after maxing your ISA allowance
• Crypto (BTC, ETH, etc.)
• Gold / silver (UK Sovereigns & Britannias are CGT-exempt — Capital Gains Tax doesn't apply)
• P2P (peer-to-peer) lending, crowdfunding equity
• Premium Bonds (~4% effective, tax-free prizes)
• Foreign brokerage accounts

Your plan's Other pot starts at £0 with a 3% real return (less 0.25% fee).

Real-life tax (not modelled — the model treats Other as tax-free)

Practical impact on £200k at 3% real: ~£1.5k/yr CGT after allowance. That's roughly a 0.7-1% return drag. To conservatively account for tax, set the Other return ~1% lower than your nominal expectation.

Downsizing — turning house equity into retirement income

For a lot of people in their 60s, the house is the biggest asset by a wide margin — often more than pension and ISA combined. Selling and moving somewhere smaller is one of the few ways to convert that wealth into spendable money without giving up where you live for years. The good news: the sale itself is almost always tax-free thanks to Private Residence Relief. The catch: there are real costs on the new purchase (Stamp Duty, estate agent fees, legal, removals) that eat ~£12k off a £200k release. The Heads-up note in your age-65 breakdown shows the worked example.

Your plan has downsizing disabled. Toggle it on in the Housing section to model an equity release.

For a normal UK homeowner downsizing their main residence:

On the sale ✅ Tax-free

• Capital Gains Tax (CGT): £0 thanks to Private Residence Relief (PRR) — provided it's been your only/main home throughout ownership
• No income tax, no Stamp Duty Land Tax (SDLT) on the sale (the buyer pays SDLT on what they purchase from you)

On the new (smaller) house 💸

SDLT (Stamp Duty Land Tax) on a £200k purchase (England / Northern Ireland rates from 1 April 2025 onwards):

• £0 – £125,000 → 0%
• £125,001 – £200,000 → 2% = £1,500
• Total SDLT: £1,500

Transaction costs (~£8-12k typical)

• Estate agent: 1.0–1.5% of sale price (~£4-6k on £400k)
• Solicitor / conveyancing: ~£1.5k
• Surveys, searches and EPC (Energy Performance Certificate): ~£500-1k
• Removals: £500-2k

Result for £400k → £200k downsize

Net cash released ≈ £188k. Tax on the proceeds themselves: essentially zero.

What happens next is where tax kicks in — interest on cash, CGT on stocks, etc. Drip the proceeds into ISAs (£20,000/yr × 2 spouses = £40,000/yr) and you can shelter most of it in ~5 years.

Withdrawal strategy — the single biggest tax decision

Once you've stopped working and have multiple pots to draw from — pension, ISA, cash, maybe a GIA — the order in which you spend them changes your lifetime tax bill dramatically. Two people with identical pots can end up paying tens of thousands of pounds more or less depending on which pot they touch first. The reason is simple: pension drawdowns are taxable, ISA / cash are not, so a year you take £30k from pension counts as £30k taxable income, but the same £30k from ISA counts as £0.

Your plan currently uses tax efficient. The three strategies the planner offers, all kicking in after your pension access age (57):

Before pension access age, the order is fixed: Cash → ISA → Other (pension can't be touched). Cash leads pre-access too because every £ left in cash bleeds value to inflation — drain it before the compounding pots.

Annuities — buying guaranteed income for life

An annuity is the opposite trade to drawdown. You hand a lump sum to an insurance company and they promise a fixed income for the rest of your life — no investment risk, no longevity risk, no flexibility, no inheritance. For decades it was how almost everyone "took" their pension; the 2015 pension freedoms made it optional, and most people now do drawdown instead. But annuities are quietly making a comeback as gilt yields have risen, and they remain the only product that genuinely eliminates the "what if I live to 100" tail risk.

When you can buy

• Any time from pension access age — currently 55, rising to 57 from 6 April 2028. No upper age limit.
• Even after you've started drawdown. They coexist: you can drawdown for ten years and then convert what's left into an annuity. Triggering drawdown does engage the MPAA (£10k/yr cap on future contributions) — but that's irrelevant once you're retired and not contributing.
• Partial annuitisation is allowed. Convert £150k of a £400k pot into an annuity for "guaranteed floor" income, leave the rest in drawdown. Modern flexi-access schemes support this directly; older schemes may need a transfer first.
• Multiple annuities at different ages ("annuity laddering") — buy a slice at 65, another at 72, another at 78. Each later purchase locks in a higher rate because you're older (shorter expected payout) and gilt yields may have moved. Common defensive strategy in the 2020s.

The trade-off

Once bought, an annuity is normally irreversible. The capital is gone — no inheritance, no flexibility, no upside if markets boom. You're swapping uncertain growth and an uncertain death age for a certain income stream. The break-even maths is brutal: most level annuities only "pay back" the original capital around age 80–82 in nominal terms, later in real terms.

The argument for buying: insurance against living to 100. With drawdown, your pot has to fund however long you live; with an annuity, the insurer takes that risk. People who massively outlive expectations win on annuities; people who die early subsidise them.

How the rate is calculated

The annuity rate (£X paid per year per £100k purchase) is essentially:

rate ≈ 1 ÷ expected_remaining_years + investment_return_on_unspent_capital

For a 65-year-old in 2026 with ~21 years of remaining life expectancy, on a 4% gilt yield, this gives roughly 1/21 + ~1.5% real ≈ 6.3% real per year. Provider margin and longevity buffer trim that to ~5.5–6.5% in market quotes.

What moves the rate up:

• Older age at purchase — biggest single lever. Rates roughly rise 5–7% per year of deferral.
• Higher 15-year gilt yields — the benchmark for annuity reserves. When gilts trade at 4%, rates are healthy; when they were at 1% (2016–2021), rates were historically dire.
• Single-life vs joint-life — joint pays ~7% less because the insurer is on the hook for two lives (HL April 2026: single 7.89% at 65 vs joint-50% 7.32% — see comparison table below).
• Level vs escalating — RPI-linked starts ~30–40% lower but rises each year with inflation. Fixed 3% escalation is ~25% lower starting.
• Enhanced / impaired-life — declared health conditions (smoking, diabetes, heart disease, certain cancers) raise the rate 5–40% because expected payout is shorter.

Real 2026 UK rates (Hargreaves Lansdown, 30 April 2026)

For comparison, at age 65 from £100,000:

• Single-life RPI-linked, 5-year guarantee: £5,438/yr starting (rises with inflation)
• Joint-life 50% spouse, level, no guarantee: £7,322/yr (~7% less than single-life because the insurer covers two lives)

Source: Hargreaves Lansdown best-buy annuity rates, generated 30 April 2026 for an average-postcode healthy buyer paid monthly in advance. Real quotes vary by provider, gilt yields on the day, and your declared health. Enhanced / impaired-life annuities pay 5–40% more for declared conditions. Annuity rates have been gender-neutral since 21 December 2012 under the EU Test-Achats ruling — providers can no longer price differently by sex.

Tax treatment

Annuity income is taxed through PAYE exactly like a salary or a DB pension — full marginal-rate income tax, paid at source by the insurer. The 25% tax-free cash (PCLS) is taken at the moment of purchase, not paid out as part of the annuity. Two paths in practice:

1. Take 25% PCLS first, then annuitise the remaining 75%. Lump goes to ISA / cash, annuity income from the residual is 100% taxable.
2. Annuitise the full pot, taking 25% PCLS at the same moment. Insurer pays out the 25% as a tax-free lump and starts the taxable income stream from the 75%. Mathematically identical to (1) — just one transaction instead of two.

Worked example: partial annuitisation at 65

You're 65, with a £400k DC pension. You decide to lock in a guaranteed income floor and keep the rest flexible:

1. Take 25% PCLS up front: £100,000 tax-free → moves to ISA / cash.
2. Of the remaining £300,000, convert £150,000 to a level single-life annuity at the 7.89% market rate (HL best-buy, April 2026) → £11,835/year taxable income for life.
3. Leave the other £150,000 in drawdown for flexibility (holidays, market timing, top-ups, inheritance potential).

Result: household has £100k tax-free in ISA, £11,835/yr guaranteed annuity (alongside State Pension when it starts), and £150k of flexible pension. The annuity covers your floor; drawdown covers your ceiling.

Modelling annuities in this planner

The Retirement income section has a dedicated Annuity (optional) sub-section. Tick Enable annuity purchase, then set:

• Purchase at age — when the conversion happens. Must be at or after pension access age.
• Amount converted — £ taken from your pension pot and handed to the insurer at purchase age. Partial annuitisation is fine; the rest stays in drawdown.
• Rate (%/yr per £100) — the £/yr the insurer will pay. Use the Estimate from age button to fill from the HL April 2026 single-life level table, or override with a real quote.
• Escalation — Level, RPI-linked, or fixed 3%/yr nominal. The model runs in real terms, so each rule applies (escalation% − inflation%) to real income each year.
• Joint-life — informational toggle. The rate you enter should already reflect the joint-life price (~7% lower than single-life on HL April 2026 best-buy). The engine treats the income as continuing across the projection horizon — we don't simulate first-death because the planner has no mortality model.

At purchase age the engine deducts the converted amount from your pension pot and starts paying the resulting income each month, taxed PAYE alongside State Pension and DB. The age breakdown for the purchase year shows a dedicated Annuity purchase card with the amount, rate, escalation rule and initial income.

Limitations: no mortality / first-death modelling (joint-life income flows full strength to the projection end age); no deferred annuities (you can simulate by setting purchase age later); no enhanced/impaired-life as a separate field — feed the higher rate from your real quote.

Goals — layering multiple targets on one plan

The Spending block alone is enough for "I want £X/month from retirement to age 90". Goals let you layer additional named claims on the household pots — a deposit for a house extension at 60, three years of school fees at 62, a one-off world trip at 70. Each goal has its own age range and amount, and the engine drains them in priority order each month.

Two kinds of goal

Priority and drain order

• Lower priority number = funded first. Ties are broken by goal id (deterministic). This matters when pots are tight: priority-1 goals get their full ask before priority-2 goals see anything.
• Income goals share the global Withdrawal strategy. They're additive into the monthly target spend, so the engine drains pots in your chosen order (cash-first / tax-efficient / pension-first) for the combined total.
• Lump-sum goals can override the drain order via their preferredPotOrder field. The engine pre-drains the lump from those pots in sequence (ISA → Cash → Other) before the main monthly drain runs. Pension is excluded from the override because it needs the global PCLS-aware gross-up math.
• If preferred pots run dry, the spill goes to the global drain and the year shows a spilled to global label in the age breakdown so you can see the routing didn't have the cash.

How goals interact with the Spending block

When you have no goals, the Spending block above is treated as a single retirement-income goal running from your selected retirement age to end age. The first time you click "+ Add goal", that implicit goal is materialised into the goals list with the current Spending value, and it stays editable from then on. Both the Spending block and the goals list will work — Spending drives the implicit goal, the goals list drives everything else.

Practical heads-up: a £50k lump-sum drawn from pension in one go can push that year's taxable income across the higher-rate threshold (£50,270) even if your normal drawdown stays at basic rate. If the goal is large and pension-funded, consider preferredPotOrder: ['isa'] to avoid the band-cross — or split it across two tax years by shifting fromAge.

Director / Ltd company strategy

If you have your own limited company, you can route savings into your pension via employer contributions — bypassing the £3,600/yr non-earner cap and saving corporation tax.

How it works

• Take minimum salary (~£12,570 to use Personal Allowance, or the Lower Earnings Limit (LEL) ~£6,725 just to keep National Insurance credits towards your State Pension)
• Company makes employer pension contributions up to £60,000/yr Annual Allowance + carry-forward of last 3 unused years (potentially £200k+ in one tax year)
• Saves corporation tax (19–25% deductible expense)
• No employer National Insurance (NI) due on pension contributions
• Pension grows tax-free; 25% tax-free at access; remainder taxed at marginal rate when withdrawn

The "wholly & exclusively" test

HMRC's main scrutiny: contributions must be commensurate with what an unconnected employee in the same role would receive. To prove the Ltd is a genuine business:

• Real third-party revenue — invoices, contracts, multiple clients
• Commercial substance — separate business bank account, accountant, business insurance, registered office, simple website
• Defensible package — total comp (salary + dividends + pension) in line with market for the role; document the comparison
• Board minutes — written resolution for each significant pension contribution citing the comparison
• IR35 check (HMRC's "off-payroll working" rules — designed to catch disguised employment) — multiple clients; right of substitution; financial risk; not a disguised employee of your old employer
• Profit to offset — corporation tax saving only works if the company has profit

MPAA — the £10k/yr trap

The Money Purchase Annual Allowance (MPAA) is the most important rule for retirement strategy. Once triggered, all future DC pension contributions are capped at £10k/yr forever.

Practical consequence

If you plan to do a large employer pension contribution (e.g. funded by a house downsize), do it before taking any taxable pension income. Live off the 25% tax-free lump sum + ISA + cash for as long as possible.

Order matters: downsize → big pension contribution → then start drawdown is meaningfully better than the reverse, by tens of thousands of pounds in lifetime tax.

Partner / couple planning

When you tick Enable partner in the Couple planning section, the assumptions column gains a You / Partner tab strip at the top. Switching tabs flips the same four sections — Personal, Current assets, Contributions, Retirement income — between editing your details and your partner's. Same fields on each side; the only difference is the values they hold.

The remaining sections — Returns, UK rules, Spending, Strategy and Housing — stay outside the tabs because they're household-level settings that apply to both of you.

What's per-person vs joint

How the engine combines the two

• Pots are pooled in retirement. Partner's starting pension and ISA are added to yours; drawdown then spends from a joint balance.
• State Pension and DB are scheduled per person. Partner's State Pension switches on at their SPA (derived from their current age), not yours; same for DB. That means partial-coverage years where one of you has SP and the other doesn't are modelled correctly.
• Annual Allowance is enforced per individual. Each spouse has their own £60k AA. Excess on either side is hard-capped — the engine doesn't silently absorb partner's unused AA against your over-contribution.
• ISA cap is per individual (£20k each). Excess spills to cash, again per person.
• Tax computation uses a doubled household band. This is accurate when both partners have similar incomes. For highly asymmetric earners (one £80k, one £0), the doubled-band approximation overstates joint tax efficiency — flagged in the "what's not modelled" list above.
• Both retire at the same time — your selected retirement age anchors the timeline, and partner contributions stop at the same calendar point regardless of how old the partner happens to be on that date. If there's an age gap, partner's State Pension and DB still kick in at their statutory ages; only the accumulation phase ends together.

Disclaimer

This guide and the planner are educational tools only — not financial, tax, or pension advice. Pension rules, tax rates, allowances and personal circumstances change frequently. The model uses simplified assumptions and may not reflect your actual position. For decisions involving meaningful sums, consult a regulated financial adviser, chartered tax adviser, or accountant.