Millions of retirees could squeeze more income out of their pensions, and avoid an unnecessary tax hit, by making smarter use of generous “tax-free” rules.

Experts say having a clear plan for how you draw your pension, alongside careful use of ISAs and allowances, can make a significant difference to how much you keep in retirement. It comes as frozen tax thresholds continue to drag more older Brits into paying higher rates, with official data showing more than 8.7 million taxpayers are now over State Pension age.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warned that many pensioners are being caught out.

She said: “Frozen tax thresholds continue to pull more people into paying more tax, with receipts for an array of taxes such as income and capital gains continuing to rise. We are seeing more pensioners facing higher tax bills.”

But she added there are “several things you can do to manage that tax bill” – and potentially boost your retirement income.

Know your limits – or risk paying more

A key starting point is understanding exactly when tax kicks in.

Most people can earn up to £12,570 a year tax-free through the personal allowance. After that, income is taxed at:

• 20% basic rate above £12,570
• 40% higher rate above £50,270
• 45% additional rate above £125,140
• There is a further sting for higher earners. Anyone with income above £100,000 starts to lose their personal allowance entirely, which disappears completely at £125,140.

Savings income is also affected. Basic-rate taxpayers can earn up to £1,000 in interest tax-free, falling to £500 for higher-rate taxpayers, while additional-rate taxpayers get no allowance at all.

The costly mistake many retirees make

One of the biggest traps is taking too much money out of a pension in one go.

Cashing in large sums can push retirees into a higher tax band unnecessarily – even if they don’t actually need all the money at once. Ms Morrissey said having a clear idea of how much income you need each year can help avoid this.

“Having a plan for how much income you need in retirement means you are less likely to stray over a threshold into paying a higher rate of tax,” she explained.

How the 25% tax-free rule can work harder

Under current rules, savers can take up to 25% of their pension tax-free. While many use this lump sum for big purchases such as holidays or home improvements, experts say it can also be used more strategically.

Instead of taking it all in one go, some retirees can access it gradually through phased drawdown – moving portions of their pension and taking the tax-free element in stages.

This approach allows the remaining funds to stay invested, while also reducing the risk of triggering a large tax bill. Crucially, dumping a lump sum into a standard savings account could create another problem – tax on the interest.

ISAs: the tax-free top-up many overlook

ISAs remain one of the most powerful tools for retirees. Income from both cash ISAs and stocks and shares ISAs is completely tax-free, making them an ideal complement to pension withdrawals.

Used correctly, ISA income can help keep total earnings below key tax thresholds. They also shield savers from capital gains tax and dividend tax, making them highly efficient for building and drawing retirement income.

However, moving investments into an ISA – sometimes called a “share exchange” – can trigger a capital gains tax charge if profits exceed the £3,000 annual allowance, so caution is needed.

Couples can cut the tax bill further

For those in a relationship, careful planning can unlock even more savings.

Couples can combine:

• Personal allowances
• Savings allowances
• Capital gains tax allowances

Assets can also be transferred between spouses or civil partners on a “no gain, no loss” basis, helping to spread income more efficiently.

But there is a catch – these rules do not apply to unmarried couples living together. With tax thresholds frozen and bills rising, more pensioners are being pulled into the tax net.

But with careful planning – particularly around tax-free pension cash and ISAs – retirees can keep more of their income and avoid costly mistakes.