How to Bridge the Gap Before State Pension Age

This article is for general information only and does not constitute financial, investment, tax, or legal advice or a personal recommendation. The value of investments can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may change in the future. You may wish to seek regulated financial advice before making significant decisions about pension access or retirement income.

Retiring and receiving the State Pension do not necessarily happen at the same time.

You may reach a point where you want to stop working several years before your State Pension age. Your finances may allow it, your priorities may have changed, or you may simply want more control over your time.

The question then becomes: how will you fund the years before your State Pension starts? 

This period is sometimes described as an income bridge. Planning it means understanding which assets are available, when they can be accessed, and what using them earlier could mean for the rest of your retirement.

If you are still deciding when retirement could be realistic, our guide to whether you can afford to retire looks at the wider financial questions involved.

What Does It Mean to Bridge the Gap Before State Pension Age?

Your State Pension age is the earliest age at which you can normally start receiving your State Pension. It is not a compulsory retirement age and may differ from the age at which you can access workplace or personal pensions.

You can use the government's State Pension age checker to find your individual date. Under the current legislated timetable, State Pension age is moving from 66 to 67 between 2026 and 2028.

Private pensions follow separate rules. According to MoneyHelper's guidance on accessing pension savings, the normal minimum pension age for most people is currently 55 and is due to rise to 57 from 6 April 2028. Exceptions can apply, including where a protected pension age exists.

This can leave several years between stopping work and receiving the State Pension.

The gap could potentially be funded through a combination of:

• cash savings
• ISA savings and investments
• workplace or personal pensions
• defined benefit pensions
• other investments
• part-time or consultancy income
• other regular income

What matters is how these sources interact, particularly where withdrawals have different tax, access and investment consequences.

Step 1: Work Out How Large the Gap Is

Before deciding where your income might come from, establish how much you are likely to need.

Check Your State Pension Forecast

Do not assume you will automatically receive the full new State Pension.

Entitlement depends on your National Insurance record and individual circumstances. The government's State Pension forecast service can show how much you may receive, when you may receive it, and whether there may be ways to improve your forecast.

Knowing the expected amount helps separate the temporary income needed before State Pension age from the income you may require afterwards.

Estimate Your Retirement Spending

Next, consider what you expect to spend once employment income stops.

Your budget might include:

• household bills
• food and everyday costs
• mortgage or debt repayments
• insurance
• travel and leisure
• holidays
• financial support for family
• major planned purchases
• an emergency reserve

Spending is unlikely to remain identical throughout retirement. The early years may involve more travel and leisure, while other costs may become more important later.

Calculate the Shortfall

A simple starting point is:

Expected annual spending - expected regular income = estimated annual funding gap

You can then consider that figure alongside the number of years remaining until State Pension age.

This is only an estimate. Inflation, taxation, investment performance and unexpected expenditure can all affect the amount ultimately required.

Step 2: Understand Which Assets Could Fund the Bridge

There is no universal order in which retirement assets should be used.

Cash Savings

Cash can be useful for expenditure expected in the near term because it may reduce the need to sell investments to meet immediate costs.

However, holding large amounts in cash over longer periods can expose spending power to inflation.

Drawing from cash first is one possible approach, but it is not automatically the right one. The appropriate balance depends on liquidity needs, tax, investment risk and the wider retirement plan.

ISAs and Investments

ISAs can provide another flexible source of funding.

Under the government's ISA rules, money held within an ISA benefits from tax-free treatment, and withdrawals from most ISAs can generally be made without losing those tax benefits. Different rules apply to Lifetime ISAs, and provider terms should also be checked.

Investments held inside or outside an ISA can fall in value as well as rise. If investments are sold following a market fall, the amount withdrawn will no longer participate in any subsequent recovery.

When you draw from each account can therefore matter almost as much as how much you withdraw.

Private Pensions

Once you reach the relevant pension access age, a defined contribution pension may also help fund the gap.

Depending on the pension and its rules, options can include taking tax-free cash, drawing flexible income, withdrawing lump sums or using some or all of the fund to secure an income.

If you have a defined benefit or final salary pension, different considerations apply. Taking benefits before the scheme's normal retirement age may result in a lower level of income, depending on the scheme rules.

Important pension risk: accessing pension benefits earlier can reduce the amount remaining to provide income later in retirement. Taxable withdrawals may also affect your Income Tax position, and certain forms of flexible access can trigger the Money Purchase Annual Allowance. The appropriate approach depends on your circumstances and the rules of your pension arrangements.

Step 3: Decide How to Draw Income

One of the more difficult questions is whether savings, investments or pension money should be used first.

There is no single order that is suitable for everyone.

Drawing from cash may leave other assets untouched for longer, while using pension income earlier could be appropriate in different circumstances. ISA withdrawals may provide flexibility where additional taxable pension income would affect your overall tax position.

The order of withdrawals can influence:

• Income Tax
• how long pension savings remain invested
• how much accessible cash you retain
• exposure to investment market movements
• future pension contribution allowances
• the sustainability of income later in retirement

There is also the Money Purchase Annual Allowance (MPAA) to consider if you plan to continue contributing to a defined contribution pension.

Certain forms of flexible taxable pension access can trigger the MPAA. If it applies, a lower annual allowance applies to future defined contribution pension savings, and contributions above that allowance may result in an annual allowance tax charge. Current thresholds are set out in the government's pension scheme rates and allowances.

Being able to access pension money does not necessarily mean that accessing it immediately is appropriate.

Step 4: Consider Whether Retirement Needs to Happen All at Once

Leaving full-time employment does not always have to mean stopping earned work completely.

A gradual transition could include:

• reducing working days
• changing responsibilities
• carrying out occasional consultancy work
• taking on selected projects
• using earnings to cover part of regular expenditure

Even some continued income could reduce the amount that needs to be withdrawn from savings or pensions during the bridge period.

Whether that appeals depends on what you want from retirement. Some people want to stop work completely, while others value greater control over when and how much they work.

Step 5: Test What Happens After State Pension Age

A bridge should not be judged simply by whether the money lasts until your State Pension begins.

The resources left afterwards may still need to support many years of retirement.

Consider how the plan might respond if:

• investment markets fall during the early years
• inflation increases expenditure
• significant unexpected costs arise
• retirement lasts longer than anticipated
• expected income changes

The difficulty is that a decision made to fund the next few years can affect income much later in retirement.

Cashflow modelling can bring these moving parts into one view. Our cashflow modelling service considers income, expenditure, assets and future goals under different assumptions, providing a way to explore how changes to retirement timing or spending might affect the wider picture.

Cash flow projections are not predictions of what will happen. Investment returns, inflation, tax rules and personal circumstances can all differ from the assumptions used.

Common Mistakes When Bridging the Gap

Several assumptions can make planning the years before State Pension age harder.

Treating State Pension Age as Your Retirement Date

They are separate dates. Whether retiring earlier is affordable depends on your resources, expenditure and wider circumstances.

Drawing From a Pension Simply Because It Is Available

Pension access creates an option, not an automatic reason to withdraw money.

Planning Only Until the State Pension Starts

The State Pension may reduce the amount required from other resources, but savings and pensions may still need to support the rest of retirement.

Taking Tax-Free Cash Without Considering the Longer-Term Effect

Taking tax-free cash reduces the amount remaining within the pension. The effect on future retirement income, taxation and other financial objectives should therefore be considered before deciding when and how much to withdraw.

Building a Bridge That Fits Your Retirement

Bridging the years before State Pension age is not simply about replacing your salary.

It involves considering how cash, investments, pensions and other income might work together while keeping an eye on taxation, investment risk and future income requirements.

A decision made to cover the years before State Pension age can have consequences well beyond that point. When you retire, which assets you use and how much you withdraw can all affect the resources available later.

Through our Retirement and Pension Planning service, we consider retirement decisions in the context of your wider financial circumstances. Any personal recommendation would depend on your individual objectives, circumstances, risk profile and suitability.

If you are considering retiring before State Pension age and want to understand how your pensions, savings and other resources could fit together, visit our Retirement and Pension Planning page to learn more about our approach.

Start with what can be established: when each income source becomes available, what you expect to spend, and how long the gap may last. From there, you can assess how different retirement and withdrawal scenarios could affect the years that follow.

State Pension age may be an important milestone, but it does not necessarily have to determine when retirement begins.

McCarthy Wealth Management is a trading style of Clarity Wealth Management LLP. Clarity Wealth Management LLP is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register under Firm Reference Number 575252. This article is for information only and should not be treated as financial, investment, pension or tax advice or as a personal recommendation. The value of investments can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may change in the future.