Retirees are being urged to maximise the use of both ISAs and pensions to guarantee a comfortable retirement.
The full new state pension is set to rise to just over £12,500 a year from April but experts warn the increase still leaves most retirees a long way short of financial stability.
Below, we take a look at why putting money into ISAs and pensions could be the best option for those looking to maximise their retirement income.
How much does someone need to retire on?
A single person needs around £43,900 a year before tax to enjoy a comfortable retirement, while a couple requires £60,600, according to Pensions UK’s Retirement Living Standards.
This includes a fortnightly holiday abroad, a car and a higher shopping budget.
Meeting those levels would require the state pension to be roughly tripled if relied upon alone.
A single retiree would need an ISA worth roughly £1.1m to safely generate that level of income, assuming a 4 per cent withdrawal rate over a 30-year retirement and not including state or private pension payments.
Higher withdrawals would reduce the size of the pot required but increase the risk that savings could run out, particularly if markets underperform or inflation remains high.
Inflation, which currently sits at 3.2 per cent, also erodes the buying power of money over time. For example, what cost £100 in 2005 now costs £178.
Why having an ISA alongside a pension can boost retirement income
Pensions remain the backbone of retirement planning because of employer contributions and tax relief.
For example, if you pay into a self-invested personal pension (SIPP), then your personal contribution will be topped up with 20 per cent basic-rate tax relief. This money is added directly to your pension.
As an example, if you pay an £80 contribution, HMRC will pay £20 on top of that, making a total contribution of £100.
Up to 25 per cent of pension savings can also usually be taken tax-free, with the remainder taxed as income.
But combining ISAs with pensions can help retirees balance tax efficiency with access to money when they need it.
ISAs offer savers the chance to put away £20,000 a year without paying tax. This is changing to £12,000 for under-65s as of April 2027.
They offer flexibility, allowing savers to withdraw money tax-free at any time without affecting income tax bands.
Using both can help retirees manage tax more efficiently, especially when drawing income before or after the state pension kicks in.
Tom Selby, director of public policy at AJ Bell, said ISAs should be seen as a complement to pensions, not a replacement.
“Pensions offer a bigger bang for your buck through upfront tax relief and up to a quarter of your fund being available tax-free,” he said.
“ISAs are useful for long-term investing with flexibility, but for most people, a pension is the primary vehicle for retirement saving.”
Craig Rickman, personal finance editor of interactive investor, added: “Keeping your tax bills low in retirement is key to making sure the savings you have accrued last as long as you do.
“This is why it’s important to build a retirement portfolio that provides a broad range of tax advantages, which for most people means a combination of pensions and ISAs.
“Other than the tax-free element, pension income is taxable, meaning HMRC can possibly grab 20 per cent, 40 per cent or 45 per cent.
“If for any reason you needed to make a sizeable pension withdrawal and have no tax-free cash spare, you could trigger a large tax bill that significantly reduces what ends up in your pocket.
“With ISAs, however, withdrawals are tax-free, illustrating why having a blend of the two can give you the best of both worlds”
ISAs are also key if you’re planning a particularly early retirement, he explained. Those who give up work before age 55 will need accessible savings, in something like an ISA, to plug the gap.
How much more than the state pension do you need
Experts have warned that the state pension alone is not enough to sustain a comfortable retirement.
Ian Futcher, financial planner at Quilter, said: “Even with the triple lock in place, people cannot approach their retirement thinking they can live off the state pension and all will be well.
“With the state pension set to be just over £12,500 per year from April 2026, that is clearly not enough to live on, especially with the cost of living pressures we continue to see.”
The state pension currently pays £230.25 a week for the full new rate and £176.45 for the basic rate.
From April 2026, payments will rise by 4.8 per cent under the triple lock, taking the full rate to £241.30 a week and the basic rate to £184.90.
While the triple lock helps maintain buying power, even the higher payments remain far below the Pensions UK moderate and comfortable living standards.
Futcher said bridging the gap requires a mix of workplace pensions, personal pensions and ISAs.
“To create a provision that will give you a moderate lifestyle, you would need to find nearly an additional £20,000 a year on top of the state pension,” he said.
“Even still, to generate a portfolio that gives you £20,000 extra a year, you need to be starting early and saving regularly.”
Selby added that relying on the state pension alone is unrealistic.
“Anyone thinking the state pension will deliver a comfortable retirement frankly needs to pour a bucket of cold water over their head and face reality,” he said.
“The state pension is only ever likely to deliver a basic living standard, and incentives in private pensions and ISAs offer people the opportunity to build financial resilience.”
Futcher also warned that it is “vital people engage with their pensions and savings as early as possible.”
How much extra income do you need in retirement?
Full new state pension from April 2026: just over £12,500 a year
Pensions UK “comfortable” standard (single): £43,900 a year
Shortfall to make up from private savings: around £31,000 a year
To generate roughly £20,000–£30,000 a year from savings alone, retirees typically need hundreds of thousands – or even over £1m – in combined pension and ISA wealth, depending on withdrawal rates and investment performance