How to protect and plan your retirement income in the first five years

– Sequencing risk

One of the biggest risks early in retirement is sequencing risk, which is the danger of poor investment returns while you’re withdrawing income.

If markets fall and you continue to draw money, you could be selling investments at lower values and effectively locking in losses.

Those early losses can reduce the size of your pot and leave you with less in your fund to benefit when markets recover, which can impact how long your money lasts.

– Withdrawal order strategy

You’ll probably have multiple sources of retirement income, such as pensions, ISAs, and cash.

Different assets are taxed in different ways, and the order you draw from them can make a difference to how much tax you pay and, subsequently, how long your money lasts.

For example, drawing everything from your pension in one go could push you into a higher tax band, whereas blending your income from different sources may help manage your tax position more efficiently.

– The Money Purchase Annual Allowance

If you choose to phase your retirement or return to work after you’ve started taking money from your pension, you could trigger the Money Purchase Annual Allowance (MPAA). This reduces the amount you can pay into your pension each year while receiving tax relief from £60,000 to £10,000.

The MPAA typically applies once you’ve begun drawing taxable income from your pension and then continue making contributions, so it’s something to be aware of if you’re planning to keep earning or topping up your savings.

– Plan your withdrawals tax-efficiently

One of the most important decisions in the early years is how much income to take. Withdrawing too much too soon can limit how long your money lasts, while withdrawing too little could mean unnecessarily restricting your lifestyle.

Creating a withdrawal plan can go a long way in making your income more sustainable, and managing how much you take each year can help you stay within certain tax bands.

This might involve:

• Using the 25% tax-free portion of your pension gradually through drawdown
• Factoring in how your State Pension and Personal Allowance affect your income each year
• Ringfencing your essential expenditure by purchasing an annuity
• Drawing from ISAs or other investments to supplement income without increasing your tax bill.

The order you withdraw from different assets can affect your overall tax position over the course of your retirement, so it’s a good idea to create a plan early on.

– Keep a cash buffer

Holding some of your retirement savings in cash or lower-risk assets can be useful for your short-term goals and emergencies.

It can also prevent you from needing to sell investments during market downturns, which can help you avoid sequencing risk.

However, it’s important to remember that cash is less likely to keep pace with inflation compared to other assets, so it’s a good idea to only hold what you need.

– Maintain a diversified portfolio

Diversification remains just as important in retirement as it was while you were saving.

Spreading your investments across different asset types, regions, and sectors can help reduce the impact of market swings by offsetting losses in one area with gains in another.

You can also think about diversification in terms of income sources, not just investments. Drawing from a mix of pensions, ISAs, and other assets can give you more flexibility and improve your tax-efficiency.

– Understand your allowances

Understanding your allowances is key to keeping your retirement income both tax-efficient and sustainable.

For example, in 2026/27, the Personal Allowance is £12,570, while the full State Pension is £12,547.60. That doesn’t leave much headroom before other income, such as pension withdrawals, starts to become taxable, so it’s important to know where you stand.

If you’re still building your retirement income, you can currently contribute up to £20,000 a year across your ISAs.

However, this is set to change under new proposals. From April 2027, you will only be able to contribute a maximum of £12,000 in your Cash ISAs, with the remaining £8,000 saved for investment ISAs. But crucially, the new limit only applies to those under 65.

As mentioned earlier, if you have triggered the MPAA, your tax-efficient pension contributions are limited to £10,000 a year. So, it’s important to factor this in if you plan to keep contributing after you’ve started drawing from your pension.

– Start planning early

Successful retirement planning rarely starts at the point you stop working. Ideally, it should be something that you’ve been developing well in advance, as this gives you time to build a plan that reflects your long-term goals and can be adapted as your circumstances change.

With retirements now often lasting several decades, taking an early approach can make a significant difference to both your financial security and your confidence in the decisions you make along the way.

– Work with an Amber River independent financial planner

The first five years of retirement are about setting a sustainable and flexible income strategy. Getting the balance right early can make a significant difference to your long-term financial security.

An Amber River financial planner can help you create a retirement plan that sets you up to be financially secure, tax-efficient, and confident in your spending wherever you are in your retirement.

They can help you decide how much to withdraw each year and structure your income in a way that makes the most of your allowances. They can also review your plan regularly and adjust it as markets, legislation, and your circumstances change.