Sidestep a potential tax breach

If you are on course to be eligible for the new full State Pension, it is worth knowing that what you might receive in one hand, could be taken by another.

From April 2026, the full new State Pension will be around £12,548 a year, edging even closer to the personal allowance of £12,570, which remains frozen.

Alarm bells should be ringing for anyone planning their retirement as once your total income exceeds your personal allowance, you will have to pay tax in retirement.

There are options to consider however, and by planning today, you could maximise a tax-free income stream to support you once you stop working.

The big ISA advantage

One way to reduce your tax liability and boost your income is making use of Individual Savings Accounts (ISAs) and what you earn from your ISA does not need to be declared to HMRC. Currently, you can invest up to £20,000 each year. (Worth noting: from April 2027 the Cash ISA limit changes for some savers, but the overall £20,000 ISA allowance remains.)

Five ways Stocks and Shares ISAs can provide a tax-free retirement income

1. Tax efficiency

Unlike pensions, which are subject to income tax when you withdraw money, money in ISA accounts stays tax-free. This allows you to maximise your retirement income without the worry of tax deductions.

Let’s say you have £100,000 in your ISA, you could choose to drawdown 4% each year, boosting your annual income by £4,000 without it counting against your personal tax-free allowance.

2. Potential for higher returns

Unlike traditional savings accounts or cash ISAs, Stocks and Shares ISAs offer the potential for higher returns by investing in the stock market.

Over the long term, stocks have historically outperformed savings and outpaced inflation, which can be important when aiming to build a retirement pot able to provide an additional tax-free income. That said, the value of investments can go down as well as up, and returns are not guaranteed — so it’s wise to invest for at least five years to help ride out any short-term market ups and downs.

3. Dividend income

A key benefit of investing in stocks is the potential to receive dividends, which some companies pay to shareholders from their profits. These payments can form part of the overall return from investing and may provide an income stream alongside long-term growth.

Within a Stocks & Shares ISA, income such as dividends or interest generated by investments can be received or reinvested without UK income tax. As rules around how income from investments may be treated in future are subject to change, the most appropriate approach will depend on individual circumstances and personal financial goals.

4. Flexibility in withdrawals

Stocks and Shares ISAs offer flexibility not just in when you can access your money — but how much, how often, and why. You’re in control.

Unlike pensions, which may restrict when and how you draw an income, ISAs let you:

• withdraw funds gradually to top up your income,
• take out tax-free lump sums when needed — whether that’s to cover unexpected expenses or fund a big goal, and
• skip withdrawals entirely in some years if you don’t need the income yet.

There are no rules forcing you to withdraw a minimum amount or lock in a schedule. You decide when and how to use your ISA pot — making it a flexible way to tailor your retirement income around your lifestyle and needs.

5. No age restrictions

Some pensions have rules about when and how you can start taking an income, so it’s worth checking your scheme’s options. Age 75 is also an important milestone in pension tax rules, so planning ahead can help you avoid surprises. However, a Stocks and Shares ISA doesn’t have restrictions about when your retirement can begin.

How to get started

It helps to have a clear idea of how much you need for retirement and what level of income you want to generate. The EQi pension calculator is a useful tool.

A well-diversified portfolio can help balance risk and return. Focus on investments that align with your risk tolerance and time horizon.

Contribute as much as you can to your Stocks and Shares ISA each tax year. Even small, regular contributions can add up over time.

By making the most of each year’s ISA allowance, you can actively build a tax-free income source for your retirement.