Retirement budget: working out your income and spending

Written and reviewed by the Later Life editorial team25 May 2026Updated 27 September 20264 min read

A retirement budget compares the income you can rely on with what you expect to spend. Start with guaranteed income, such as the State Pension, then add money you can draw as needed, such as savings. List spending in three groups: essentials, lifestyle and one-off costs. The difference shows what you may need to plan for.

Why a retirement budget looks different

At work, income usually arrives as one regular pay packet. In retirement, income often comes from several places, arrives at different times and is taxed in different ways. Spending changes too. Commuting costs may stop, while heating, home upkeep and health costs can rise. A budget built for retirement helps you see the whole picture in one place.

Step 1: list your retirement income

Work in monthly figures, or annual if that is easier, but use the same period throughout.

Guaranteed income

This is money that arrives whatever happens to investment markets:

State Pension. The full new State Pension is £241.30 a week in the 2026 to 2027 tax year. Your own amount depends on your National Insurance record, so check your forecast on GOV.UK.
Defined benefit pensions from past employers, which pay a set income.
Annuities, which pay a guaranteed income, usually for life.

Income you can vary

Defined contribution pension pots, drawn as and when you choose. Taking more early leaves less for later. Our guide to pension drawdown vs annuity explains the trade-off.
Savings and ISAs.
Part-time work or rental income, if you have it.

Benefits you may be missing

Pension Credit can top up weekly income to £238.00 for a single person or £363.25 for a couple in 2026 to 2027, once you reach State Pension age. Attendance Allowance is not means-tested and is paid to people of State Pension age or over who need help because of an illness or disability.

Allow for tax

Budget with income after tax. The State Pension and other pension income count towards your taxable income. The standard Personal Allowance, the income you can have before paying Income Tax, is £12,570 in 2026 to 2027. Usually up to 25% of a pension pot can be taken tax-free, and the rest is taxed as income.

Eye-level view of a neat desk with financial documents and a calculator

Step 2: list your spending

Bank statements from the past year give a realistic starting point. Sort each item into one of three groups.

Essentials

Council tax, energy, water, food, insurance, phone and broadband, transport, and any mortgage or rent. Some people aim to cover these with guaranteed income, because they do not stop if markets fall.

Lifestyle

Holidays, hobbies, eating out, gifts and helping family. These can be scaled up or down, which gives you room to adjust.

One-off and irregular costs

A replacement car, a new boiler or roof, home adaptations, dental work or long-term care costs. Estimate a yearly amount for each and divide by twelve to include it in your monthly figures. Leaving these out can make a budget look healthier than it is.

Step 3: compare income and spending

Subtract total spending from total income.

If there is money left over, you may choose to build an emergency fund or keep more invested for later years.
If there is a gap, you can look at it from both sides. On the income side: claiming benefits you are entitled to, changing how you draw your pension, or working a little longer. On the spending side: cutting lifestyle costs or switching providers for bills.
If the gap is large or long-term, some homeowners look at using the value in their home. Our later-life financial planning guide compares those options, including their costs and effect on inheritance.

High angle view of a calculator and house keys on a wooden table

Keeping your retirement budget up to date

A budget is not a one-off exercise. Review it:

each April, when the State Pension and many benefits are uprated and new tax-year allowances apply;
when a big bill changes, such as energy or insurance;
after a major life event, such as bereavement, a move or a change in health.

Spending often changes through retirement. Early years may include more travel, while later years may bring higher costs for help at home. Revisiting the numbers helps you notice early if savings are running down faster than expected.

Where to get help with a retirement budget

MoneyHelper offers a free budget planner and impartial help on pensions and money. Pension Wise gives free guidance on taking money from a defined contribution pension. If you would like a personal recommendation on how to draw your income, consider speaking to an FCA-regulated financial adviser. We do not provide financial advice.

Frequently asked questions

How do I work out my retirement income for a budget?

List every source and its amount after tax, using the same period for each. Start with guaranteed income such as the State Pension, defined benefit pensions and annuities. Then add income you can vary, such as drawdown from a pension pot, savings and any part-time work. Check your State Pension forecast on GOV.UK for an accurate figure.

What spending do people forget in a retirement budget?

Irregular and one-off costs are easy to miss. Examples include replacing a car, a new boiler or roof, home adaptations, dental work and help at home later on. Estimating a yearly amount for each and dividing by twelve lets you include them in a monthly budget, so the figures are not flattered by leaving them out.

Is the State Pension taxable?

Yes. The State Pension counts as taxable income, although tax is not taken from it before it is paid. Whether you pay tax depends on your total income, including other pensions. The standard Personal Allowance is £12,570 in 2026 to 2027. Tax due on the State Pension is often collected through the tax code on another pension.

How often should I review my retirement budget?

Many people review it once a year, often in April when the State Pension and many benefits are uprated and a new tax year starts. Many people also revisit it after a big change in bills, a move, a change in health or a bereavement, as any of these can shift both income and spending.

What if my retirement budget shows a shortfall?

You can look at both sides. On income, check benefits such as Pension Credit, review how you draw your pension, or consider working longer. On spending, look at lifestyle costs and bills. Some homeowners also look at using the value in their home. Each option has trade-offs, and an FCA-regulated adviser can look at your situation.