So the choice you face is whether to be taxed twice on the second or the third year's income. The choice is yours, so clearly you will choose the year when you had the least income to be taxed. Thereafter, you continue to be taxed on the previous year's income. You can exercise this choice up to six years after the year in question.
Similar provisions apply when the source of income ceases. One of the final years' income is not taxed at all. Normally it is the last but one year which is omitted, so that the final tax bill is on the final year's tax.
But the Revenue, not you, can choose to tax the last but one year instead of the final year if they wish. They usually choose to do so to increase your tax bill.
Your retirement pension counts as part of your income, so you can have only a limited income on top of it before you start paying tax. This section of the site looks at the interaction of tax and pensions, including widow's pension and foreign pensions.
In 2012/13 the age allowance is 7180 (£61.19 a week) for a single person aged sixty-five to seventy-nine. The basic retirement pension is 81.19 . So you can have 80 income a week on top of the basic retirement pension before you start paying tax. The figures for a married man where he and his wife are under eighty and one of them is sixty-five or more is £60.96. For people over eighty, the figures are 88.9 0 (single) and 68.8 (married) on top of the basic retirement pension. A single woman aged under sixty-five throughout the tax year who does not get the age allowance can only have about 8.99 a week on top of the basic pension before she starts paying tax.
If you have extra amounts . . . ... see: Tax and retirement - Income on Top of Basic Pension