4 smart ways to use your ISAs in retirement

When you approach the end of your career and start thinking about retirement, your pension tends to take centre stage. But, it’s worth thinking about how you could use ISAs alongside your pension in your retirement income plan. 

ISAs are tax-efficient saving and investment accounts. There are a few different types, but the main ones are Cash ISAs (for saving) and Stocks and Shares ISAs (for investing). 

You can contribute across your ISAs up to the ISA allowance each tax year (£20,000 in 2025/26). Any interest or investment returns you then receive are tax-free.

The average 65-year-old has £64,386 saved in ISAs. Used wisely, that money could reduce your tax bill in retirement and give you more financial freedom. 

That’s because, alongside facing no tax on interest or investment returns, your ISA withdrawals are also tax-free.

The difference with pensions is that you get tax benefits on the way in – tax relief boosts your contributions and your pot grows tax-free. 

When you start withdrawing from your pot, you can take the first 25% tax-free. That’s up to the lump sum allowance of £268,275 (2025/26).

However, anything you draw above that may be subject to Income Tax, depending on your total income in that tax year.

Withdrawals from an ISA – whether that’s a cash withdrawal or dividend income – don’t count as income. So, they attract no tax charge, don’t use up your tax-free Personal Allowance, and won’t push you into a higher Income Tax band.

Here are four smart ways to make the most of your ISAs in retirement.

1. Bridging the gap

Historically, retirement could be quite simple. You'd finish your last day of full-time work and, if you’re eligible, claim your State Pension (from age 66, rising to 67 by 2028). Now, you have more choices for what your retirement could look like.

You may want to retire once you can access your personal or workplace pensions - in 2025/26, that’s from age 55 (rising to 57 from 2028). Or you might want to semi-retire, gradually winding down with part-time work or a side hustle.

ISAs can help bridge the gaps between these ages as you can access most ISA savings at any age. So, they can be a helpful pot to tap into if you want to stop working before you can access your State, workplace, or private pensions.

Used like this, ISAs can help smooth your transition into retirement.

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2. Topping up your income

As already mentioned, after you’ve withdrawn your 25% tax-free lump sum, most pension withdrawals (from 55, rising to 57 from 2028) are potentially taxable. This can be expensive in the early years of retirement, when pension withdrawals alongside part-time work or other income streams can push you into a higher tax bracket.

ISAs can help by offering a tax-free income stream. This could allow you to draw less from your pension and potentially lower your taxable income.

For example, think back to the average £64,386 ISA balance. Someone earning 5% in interest or investment returns from their ISA savings would receive £3,170 a year, tax-free. 

They might also receive dividends on some of their investments. Assuming a 2% dividend return, that’s another £1,270 tax-free. Combined, that’s £4,440 a year that could be added to your income without incurring a tax charge. 

That £4,440 doesn’t count as income at all for tax purposes, so it won’t affect your Income Tax bracket. 

Drawing income from your ISAs while reducing pension withdrawals could lower your tax rate. Or, it could even bring your income below the Personal Allowance.

3. Covering big costs

ISA savings can help pay for one-off items. That might be:

• bucket list trips; 
• building work that future-proofs your home; or 
• gifts to family. 

Often, you’ll encounter many of the big costs in the early years of retirement when you may be paying higher levels of Income Tax. Using your ISAs in this period can make a big difference to your tax planning, as you can take as much as you like from them without triggering a tax bill. 

You’ll also preserve more of your pension in investments that could continue to grow.

4. A home for emergencies

A Cash ISA can be a helpful home for your emergency savings. By choosing a high-interest account, you’ll get tax-free growth with the certainty that your money’s there when you need it. 

While you’re working, the rule of thumb is to work out your essential outgoings and have three-to-six months’ savings in an emergency pot. This rises to one-to-three years in retirement.

That’s because you no longer have a salary to fall back on and may be relying on the investments in your pension to fund your lifestyle. A larger emergency fund reduces the risk of having to sell investments unexpectedly. That could matter during a market downturn when those investments might have temporarily lost some of their value.

An ISA can be an effective place to store a rainy-day fund.

Summary

In retirement, it’s important to step back and look at all your savings, investments, and potential income streams. Then, you can be confident you’re making the most of what you have. 

That means: 

• limiting your tax bill; 
• keeping a mix of easily accessible cash savings and long-term investments; and 
• thinking carefully about the right ways to draw income throughout your retirement. 

ISAs could be a useful part of that plan.

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Ruth Jackson-Kirby is a Financial Journalist passionate about making money matters clear and accessible. She’s written for The Mail on Sunday, MoneyWeek, The Sun, and Good Housekeeping, helping readers navigate pensions and personal finance with confidence. She believes everyone deserves financial security and is on a mission to cut through jargon and make finance relatable.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.