Where the money comes from
In brief: In retirement, income arrives from multiple sources on different schedules and with different tax treatment. Spending covers everything from daily essentials to one-off costs. Each year, the gap between income and spending determines whether your wealth is growing or being drawn down.
During your working life, money flows in one main channel: your salary. In retirement, the picture becomes more complex. Income typically arrives from several sources, each starting at a different age and taxed in a different way.
Employment income
If you continue working part-time or phase into retirement gradually, employment income may overlap with pension income for several years. This can push your total income into higher tax bands, so understanding the overlap matters.
State Pension
The State Pension provides a baseline income from your State Pension age (currently 66, rising to 67 by 2028). The full new State Pension is £11,973 per year (2025/26). It is taxable income, though it is paid gross — without tax deducted at source.
Defined benefit pension income
If you have a defined benefit (DB) pension, it pays a guaranteed annual income, usually starting from your scheme's normal retirement age. Most DB pensions increase annually with inflation, providing a predictable income floor. This income is taxed as employment income.
Drawdown from defined contribution pensions
Money in SIPPs and workplace pensions does not arrive automatically. You choose when and how much to withdraw. Each withdrawal is split: 25% is typically tax-free and 75% is taxed as income. The timing and size of withdrawals directly affects your tax bill in each year.
Other income sources
Rental income from property, annuity payments, dividend income from investments outside tax wrappers, and interest on savings all contribute to the picture. Each has its own tax treatment and timing.
Where the money goes
Spending in retirement is not a single number. It falls into distinct categories that change over time.
Essential spending
Housing costs (mortgage, rent, council tax, insurance), food, utilities, transport, and healthcare. These costs are largely non-negotiable and form the baseline that your income must cover.
Discretionary spending
Travel, dining out, hobbies, gifts, subscriptions, and entertainment. These costs are flexible and tend to be highest in the early, active years of retirement. Many people find discretionary spending naturally decreases as they move into their seventies and eighties.
One-off expenses
Replacing a car, major home repairs, helping children with a house deposit, or a significant holiday. These lumpy costs do not recur annually but can be large enough to create a shortfall in the year they occur.
Care costs
In later life, care costs can become a significant expense. Residential care in the UK averages £35,000 to £50,000 per year, and nursing care can exceed £60,000. These costs are difficult to predict but important to model, even as a rough provision, because they can deplete assets rapidly.
The annual balance
Each year, the calculation is straightforward in principle:
Income minus Tax minus Spending = Surplus or Shortfall
If your after-tax income exceeds your spending, you have a surplus. If your spending exceeds your after-tax income, you have a shortfall.
What happens with a surplus
When income exceeds spending in a given year, the excess accumulates as cash. Depending on how your model is configured, surplus cash may sit in a bank account or be swept into other assets like an ISA or investment account. Either way, it adds to your total wealth.
What happens with a shortfall
When spending exceeds income, the gap must be filled from your existing assets. This triggers a withdrawal — money is taken from your savings and investments to cover the difference.
The order in which assets are drawn down matters significantly. Different accounts have different tax treatment:
- Cash — no tax on withdrawals, but earns minimal growth
- ISA — no tax on withdrawals, and the investments inside can continue growing
- General Investment Account (GIA) — withdrawals may trigger Capital Gains Tax
- Pension (SIPP or workplace) — 25% tax-free, 75% taxed as income
Drawing from a pension when you already have significant taxable income could push you into a higher tax band. Drawing from an ISA has no tax impact at all. The sequencing of withdrawals is one of the most important factors in determining how long your money lasts.
How this repeats year by year
A single year's balance tells you whether you are gaining or losing ground. But retirement spans decades. The real value of modelling is seeing how the annual balance compounds over 25, 30, or 35 years.
In the early years, you might have a surplus from employment income or a combination of pensions. In later years, as spending on care increases and investment pots shrink, shortfalls may appear and grow. The trajectory — the shape of the curve — reveals whether your money is likely to last.
Each year's closing position becomes the next year's opening position. Assets that were drawn down have less capacity to grow. Assets that were left untouched benefit from compounding. This cascading effect is why small differences in annual spending or withdrawal order can produce large differences in outcomes over a full retirement.
Why the flow matters more than the total
It is tempting to focus on total wealth — "I have £500,000 in pensions." But the total does not tell you whether your money will last. What matters is the flow: how much comes in, how much goes out, and what happens to the gap each year.
Two people with identical total wealth can have very different outcomes depending on:
- When their income sources start (early retirees face more years of drawdown before State Pension begins)
- How much they spend and when spending changes
- Which accounts they draw from first
- How their assets are invested and what growth rate they achieve
Understanding the flow — not just the stock — is what turns a vague sense of "enough" into a clear, year-by-year picture.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.