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If you’re approaching retirement and have savings in pensions, ISAs and other accounts, deciding which to use first isn’t always straightforward.
There are several different factors to consider, including the tax efficiency of these accounts, the impact using them might have on any inheritance you’re planning to leave, and the risk of running out of money if you take out too much too soon.
Here, we’ll explain a tax-efficient way to draw an income in retirement, and you might be able to tailor this to your individual circumstances.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
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Why the order you withdraw money matters
The order you withdraw money from your savings is important because it can significantly affect how much tax you pay, how long your money lasts, and what you leave behind to others. Here’s how the tax treatment of different accounts varies:
Pensions
Usually, 25% of your pension can be taken tax-free, either in one go or spread across withdrawals, while the remainder is taxable as earned income once it exceeds the personal allowance (£12,570). Learn more in our article How much tax will I pay on pension withdrawals?
ISAs
Money you take out of ISAs, and any returns from these accounts, are tax-free, so won’t affect the amount of income tax you pay.
Savings accounts
If you have money held in savings and investments outside an ISA wrapper, withdrawals themselves aren’t taxed. However, there may be tax payable on your returns.
This will depend on how much they are and whether you are a basic, higher or additional rate taxpayer. Under Personal Savings Allowance rules:
- You can get up to £1,000 a year in savings income tax free if you’re a basic rate taxpayer
- You can get up to £500 a year in savings income tax free if you’re a higher rate (40%) taxpayer
- You get no savings income tax free if you’re an additional rate (45%) taxpayer. You can learn more in our guide What is the Personal Savings Allowance?
In most cases, the goal is to make full use of your tax-free allowances each year, while keeping as much of your remaining savings growing tax-efficiently as possible.
A step-by-step withdrawal strategy
While there’s no one-size-fits-all answer, many retirees follow a broadly similar approach when withdrawing money from pensions, ISAs and savings accounts.
Step 1: Use your personal allowance
Most people can earn up to £12,570 a year without paying income tax (the personal allowance).
If you’re retired, this often means taking pension income up to this level and paying little or no tax on it. This assumes that you aren’t yet claiming the State Pension, which in the 2026/27 tax year would use up nearly all of your personal allowance were you claiming the maximum £241.30 a week. Learn more in our article What is the State Pension in 2026?
Step 2: Make use of tax-free pension cash
You can usually take up to 25% of your pension savings tax-free. Rather than taking this all in one go, which can result in a hefty tax bill, many people choose to withdraw it gradually over several years, and combine it with taxable income to stay within lower tax bands.
For example, if you wanted to take £50,000 out of your pension, and you chose to do this in one tax year, assuming you have no other income, you could take £12,500 tax-free (25% of the amount withdrawn).
This would leave a taxable portion of £37,500. Once your £12,570 personal allowance is deducted, the remaining £24,930 is taxed at 20%, giving you a tax bill of £4,986.
However, if you decided to take £25,000 one year and £25,000 the following year, £6,250 of each withdrawal would be tax-free and £18,750 taxable. After the £12,570 personal allowance is deducted, this leaves £6,180 of each withdrawal taxed at 20%, which gives a tax bill of £1,236 each year, or total tax of £2,472. This is less than half the tax you’d pay if you withdrew the full £50,000 at once.
Learn more in our article How to reduce your tax bill when you take money out of your pension.
Step 3: Use ISAs strategically
ISAs can be one of the most valuable accounts to use in retirement because withdrawals are completely tax-free. For example, you might use some of your ISA savings to top up your income without increasing your tax bill, cover larger one-off or unexpected expenses, or to help bridge the gap if you want to limit pension withdrawals in a particular tax year. Find out more in our article Is it better to save into an ISA or a pension?
The maximum you can currently pay into an ISA each tax year is £20,000. You get a new ISA allowance at the beginning of each new tax year starting on April 6, so if you can afford to put money away every year, you can create quite a significant tax-free savings pot over time. Any part of your allowance you haven’t used by the end of the tax year cannot get carried over into the next tax year, so it’s a case of ‘use it or lose it’.
The amount you can save into cash ISAs is set to fall to £12,000 from 2027 under proposed changes, unless you’re aged 65 or above. Learn more about this change in our article What could Budget changes to cash ISAs mean for you?
Step 4: Manage your tax bands carefully
Remember that once your income goes above the personal allowance, you’ll start paying tax.
When you take money out of your pension, only part of it will be tax-free, with the rest taxed as income. If you’re not careful, this could push you into a higher tax bracket, leaving you with a hefty tax bill that might have otherwise been avoided. You can find out more in our guide Four big risks of dipping into your pension.
This makes it important to avoid taking large lump sums where possible and instead spread withdrawals across multiple tax years. Learn more in our article How to reduce your tax bill when you take money out of your pension.
A typical order therefore might look like this, although the right order for you will depend on your individual circumstances, including your income needs, health, and long-term plans:
- Take pension income up to your personal allowance
- Use cash savings (within tax-free interest allowances)
- Use ISA withdrawals to top up income if needed
- Take additional pension income carefully, keeping an eye on tax bands
This approach helps you make use of tax-free allowances while keeping your overall tax bill as low as possible.
If you’re retiring as a couple, it’s worth thinking about planning together, so you can make full use of both personal allowances, and potentially split your retirement income to enable you both to stay in lower tax bands. For example, instead of one person taking £25,000 from a pension (and paying tax), you might each take £12,500 and stay largely within tax-free limits.
A simple example
Simon, aged 63, retires with the following savings:
- £300,000 in a pension
- £100,000 in ISAs
- £50,000 in cash savings
He estimates that he’ll need around £20,000 a year to live on.
A tax-efficient approach might look like this:
Simon takes around £12,500 from his pension (within his £12,570 personal allowance). He then uses £7,500 from his cash savings to top up his income, and keeps the rest of his ISA savings invested for future use. He also keeps £20,000 in savings for any unexpected expenses.
This approach helps Simon minimise tax while preserving his tax-free ISA funds for later years. Over time, he can adjust this balance depending on his needs and to take account of his State Pension which he should start receiving when he is 66 (the exact date will depend on his specific birth month).
Remember inheritance tax (IHT)
One often overlooked factor when people take money out of pensions, ISAs or savings and investments held outside ISAs, is what happens to your money when you die.
Under current rules, pensions can often be passed on tax-efficiently, as they usually fall outside your estate for inheritance tax purposes. The same cannot be said of ISAs and other savings accounts which typically form part of your estate for inheritance tax. Learn more in our article What happens to my ISA when I die?
This has traditionally meant some people choose to spend ISAs first and leave pensions until later.
However, this is set to change from April 2027 when pensions will fall into the scope of inheritance tax for the first time. Read more about what these changes could mean for you in our guide Inheritance tax and pensions: what’s changing in 2027.
A spokesman for Interactive Investor said: “Pensions being shielded from IHT has been a cornerstone of retirement planning. Removing this benefit is set to lead to substantial tax liabilities for heirs and alter the calculus of intergenerational wealth transfer.
“In this new paradigm, pensioners might be more inclined to draw down their pension pots during their lifetime, rather than preserving them for inheritance purposes. This could lead to a shift in focus towards other tax-efficient savings vehicles, such as ISAs.
“The ISA versus pension debate, therefore, could gain fresh momentum. ISAs offer the advantage of tax-free growth and withdrawals. Pensions, on the other hand, still provide upfront tax relief on contributions and potential for employer contributions, but their appeal may be blunted somewhat by the new inheritance tax considerations.”
A final thought…
There’s no single ‘right’ order to draw your pension, ISA and savings when you need retirement income. The right approach for you will depend on the amount you need, your tax position, and your longer-term goals.
For many people, a blended strategy works best, using pension income up to tax-free limits, topping up with ISAs or savings, and adjusting withdrawals over time.
Whichever approach you choose, make sure you have some immediately accessible savings available in case of emergencies or unforeseen expenses.
Bear in mind that once you’ve found an order you’re comfortable with, it doesn’t mean this can’t change later on. Reviewing your plans regularly can ensure they match your goals and, if they don’t, make changes if needed.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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