The fundamentals of how to pay for retirement come down to the products and assets that you can use to build wealth that can then be used when you no longer want to work.
It is important to have this ‘when’ in mind because it will be different for many of us, depending on how – and what – we do on the road to get there.
Key tools to fund retirement
The first thing to consider is what key tools you have at your disposal to fund your retirement. These tools come in the form of assets that you can build up in value over time, which eventually can be used to pay for your golden years.
It is critical to ensure you understand the benefits and drawbacks of each to establish which ones to prioritise – both when building a portfolio and when you come to use that portfolio to pay for your retirement.
1. Your pension
Pensions form the absolute core of funding retirement for most people in the UK in 2025. This is because pensions are specifically designed for retirement. This includes tax incentives in your working years that encourage higher pension saving and investment rates.
Pensions come with extremely valuable tax relief – either 20% or 40% depending on your marginal tax rate. While pensions have tax implications on drawdown (when you’re old enough to start withdrawing), the tax-free element gives them a powerful head start to ensure investments can compound in value over time.
2. Your ISA
ISAs are second only to pensions in terms of long-term value for retirement savings. While they don’t get the tax relief head start of pensions, the £20,000 annual contribution allowance is not to be sniffed at.
ISAs have the benefit of being tax-free for life for everything inside the wrapper. This means that in retirement, they can be an extremely effective source for retirement funds.
ISAs come in cash or investment varieties (more on cash below). You can also access a Lifetime ISA (LISA), which offers up to a £1,000 annual bonus if you contribute the full £4,000 limit each year.
However, for retirement savings, the LISA has a significant drawback in that you cannot contribute more once you turn 50, and is subject to a 25% charge on any funds withdrawn or transferred before age 60. This means that your pot will sit without additional contributions for a decade.
3. Your cash
Cash is perhaps not quite the same as the others on this list. While cash itself loses value if it’s not in a savings account that beats inflation, it does have a place in a long-term portfolio, particularly in the form of a short-term rainy-day fund.
When saving for retirement, life happens to us, unexpected costs and bills, loss of income through ill-health or job loss, these are normal, albeit unfortunate, life events. Having a cash buffer for such short-term issues can be vital in not harming your wider long-term retirement strategy and prevent the need to use valuable long-term investments or other assets to keep your head above water.
When using cash, it is essential to ensure it is earning a good rate of inflation but remains accessible for emergencies. It should also be capped – typical rules of thumb include three to six months’ worth of household expenses to pay for the mortgage and other bills.
4. Your home
This is one of the main ways in which people build wealth over a lifetime. However, it is typical for many people not to see their home as an ‘asset.’ After all, you bought it to live in and might not be planning on selling or downsizing any time soon!
But it should still be considered in the mixture of assets that make up your long-term wealth and portfolio. This is because there are long-term tax – and even inheritance factors – to consider around your home.
This can mean using the value in the property to help fund portions of retirement, such as through products like equity release or lifetime mortgages[DM1] .
*Please seek financial advice before making any decisions on your property
5. Your business
Not everyone runs their own business, but it is not uncommon! Running a business can be tough, but the potential rewards can also be great. Entrepreneurs should consider what they ultimately want with their business and when they might want to step back.
Selling a successful business can be a financial boon, but it brings tax and other implications that arrive with a significant windfall. The good news is that such a windfall can be managed to ensure its long-term growth and tax efficiency.
Using these assets in retirement
Some or all of these assets will form the foundations of how you fund your retirement. There is a myriad of options with how, in what order and whether you should continue to try and grow them despite finishing work.
For example, while pensions are excellent for building long-term retirement funds, they come with significant tax implications, such as the money purchase annual allowance (MPAA), which can dictate how much you contribute in to your pension. There are also future considerations around inheritance, as the Government is planning on including pensions in estates for inheritance tax purposes from 2027. This process can be tricky, especially when it comes to the potential tax consequences. It is important if you’re in any doubt to seek professional financial planning help to ensure the best outcome for your retirement funding plans.
Please seek financial advice before making any decisions on your property.