Guide to budgeting for your retirement

This content was reviewed and approved by Tamlin Russell.

Why is it important to review my retirement budget?

Working out your retirement budget is essential to ensure you have enough income and savings to support your lifestyle and financial needs. Whether covering living expenses, paying for holidays, or helping loved ones, there’s so much to consider. 

If you’re wondering how much pension money you’ll need to live comfortably in later life, the following ideas will show you how to budget in retirement and make your money go further.

1. Assess your current outgoings

If you’re approaching retirement age, it’s good to start thinking about how much you’ll need to see you through retirement and achieve the lifestyle you want when you stop working.  But balancing your retirement budget with your expenses and outgoings can be tricky.

The first step is to review your current spending habits, and categorise them accordingly:

• Essential expenses: The money you’ll need to cover basic living needs such as utility bills, mortgage and housing costs, groceries and travel.
  

• Optional expenses: Money for non-essential things like holidays, leisure and eating out.

2. Adjust your retirement spending and outgoings

Think about how your spending habits might change once you retire. Consider whether your mortgage will be paid by the time you retire, and any additional money you may spend on leisure and hobbies.

Whether you’re nearing retirement or already claiming your pension, reducing your outgoings by cutting back on non-essential items could improve your retirement budget.
Work out your retirement income and make a list of your outgoings and regular expenses. This will help you identify any financial shortfall so that you can adjust your spending accordingly.

3. Calculate your pension income

It’s wise to calculate how much income you’re likely to have in retirement several years before you decide to retire. This should include the money you’ll receive from a variety of sources, including personal pensions, the State Pension and other savings. This process includes:

• Asking your pension provider(s) for an up-to-date retirement statement that shows how much money is in your retirement pot.
  

• Finding out the value of your defined benefit pension pot if you have this type of policy. You should receive an annual statement, and your provider will be able to explain your retirement options.
  

• Totting up any savings and investments you have built up that could help to boost your retirement income.
  

• Searching for any lost pensions by using the government’s free Pension Tracing Service.

You can also use the pension calculator from MoneyHelper to find out what income your pension could give you and find out how consolidating your pension pots could boost your savings

4. Check if you’re eligible for the State Pension

The State Pension currently pays up to £230.25 per week (2025/26) for people retiring on or after 6th April 2016. This is available once you reach retirement age, but you'll need to meet the eligibility criteria.

You’ll have a better idea of your retirement budget by getting a State Pension forecast. This provides you with an estimate of how much money you’ll receive from the State Pension based on your National Insurance contributions over time. 

5. Consider your retirement income options

• Your retirement budget may depend on the type of pension you have. This will also help you decide how to draw your retirement income when the time comes.

• Defined benefit pension: This typically pays you a guaranteed income from your normal retirement age or under specific terms of the scheme. The amount you’ll receive depends on your salary and how long you worked for your employer. You may receive a lump sum on top of your pension, or withgo some income to receive a lump sum.
  

• Defined contribution pension: You can normally access your defined contribution pension pot from age 55 (rising to 57 from 2028). There are several ways you can take your money, whether as regular income or lump sums, as and when you choose, depending on your income needs.

If you’re wondering what your monthly income could be, our pension annuity calculator can help you work out how much money you’re likely to get so you can set your retirement budget.

6. Boost your retirement income

With your estimated outgoings in retirement, pension income calculation and State Pension, you'll be able to see if there's a shortfall in your retirement budget. If there is (and even if there isn't) take a look at our tips on how to boost your retirement income.

You may decide to keep working past State Pension and retirement age to top up your pension pot. As well as adding to your retirement income, continuing to work in retirement, whether part-time, full-time or self-employed, is a good way to remain active and enjoy the social benefits.

However, it is important to understand that working beyond your State Pension age could also push you into a higher tax bracket.

7. Use your home as a retirement income source

If you’re a UK homeowner aged 55 and over, equity release could help you achieve the comfortable retirement you’re seeking when you give up work. It’s a simple way of unlocking money tied up in your property and converting it into tax-free cash.

There are different types of equity release, and one of the most common options is a lifetime mortgage. This is a loan secured against your home that you’ll only pay back when you die or move into long-term care. However, equity release can also leave you with less money to leave to others as inheritance.

8. Make a solid retirement plan

It’s important to consider your life expectancy, how long your retirement might last, and the impact inflation may have on your income:

• A male aged 65 can expect to live on average 18.5 years; a woman over 21 years.
  

• At 3% per annum inflation, the value of your money almost halves over 20 years.

This means you will probably need to use all your sources of income when budgeting for retirement. These could include personal and company pensions, State Pension, savings and investments (ISAs), equity in your home and other income such as inherited wealth.

Once you have worked out your retirement income, you should be in a better position to set your retirement budget and achieve a comfortable lifestyle. If you’re unsure about your next steps, seek professional retirement and pension advice to help you plan for the future.

Do you need help setting your retirement budget?

At LV=, our retirement and pension advice service will help you make the most out of your pension pot and set your retirement budget. Request a call back today to speak with one of our specialist advisers.

Retirement budget FAQs

Is my pension taxed?

Yes, pension income is taxed like any other form of income. In 2025/26, the standard Personal Allowance in the UK is £12,750. Any income above this amount is taxed at 20% up to £50,270. If your income is more than £125,140 you’ll be taxed at the higher rate of 45%. However, some pension plans such as pension drawdown can help you minimise your tax liability on your pension.

What portion of my pension is tax-free?

If you’re 55 or over, you can usually take up to 25% of your pension pot tax-free, with the remaining 75% taxed as income in the usual way. You can either take the 25% tax-free cash either as a single lump sum or in a series of smaller payments. 

Can I continue working while drawing a pension?

Yes, there’s nothing stopping you from working while drawing your pension. Many people choose to do so as a means of topping up their pension income while remaining active in their later years. However, any additional retirement income could push you into a higher tax bracket and affect the amount of tax you pay on your pension.