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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
You’ve spent years building up your pension and savings to fund a comfortable retirement. But once you stop working, there’s a big question to answer: which pot should you spend first?
You might have money in a pension (or pensions), individual savings accounts (ISAs), or other types of savings product. Congratulations! But the order in which you draw on them could affect how much tax you pay and how long your money lasts.
Added to that, from April 2027, most unused pension funds are due to fall within the scope of inheritance tax (IHT), potentially leaving more families facing a tax bill.
So, should you spend your cash savings first, dip into ISAs, or start drawing from your pension? We’ve asked the experts.
What’s on this page?
Unfortunately, experts agree that there is no single right answer when it comes to the order in which you should use your retirement savings. This is because it can depend on several factors.
Dan Browne, financial planner at Smith & Pinching, says: “Historically, many people tended to dip into cash and ISA savings first, leaving their pension until last.”
The key reason for this was that money left in a pension is currently exempt from IHT, while cash and ISA savings form part of a person’s estate.
But from April 2027, most unused pension savings will also come within the scope of IHT, giving those approaching retirement more to consider.
With that in mind, Zoe Till, chartered financial planner at Nelsons Law, says a good starting point is to compare your guaranteed income, such as the state pension (once it begins), with your regular expenditure.
“This helps identify how much additional income you need from pensions, ISAs or cash savings,” she explains.
For example, let’s run through some scenarios for someone with £200,000 saved into a pension, £100,000 in ISAs and £50,000 in cash savings.
Till says this person’s withdrawal strategy will depend on their circumstances.
Assuming they qualify for the full state pension and need their savings to last until age 100, they could potentially have spending power of around £26,000 a year, including their state pension, rising broadly with inflation, depending on investment returns and future market conditions.
She says: “Initially, the pension withdrawals could potentially be funded using the available tax-free cash entitlement rather than taxable income.
“A £200,000 pension fund could currently provide up to £50,000 of tax-free cash, which in this example could be used to bridge much of the gap between the individual’s state pension and desired expenditure.”
Once the tax-free cash, taken in stages, has largely been used up, ISA savings could then provide a further source of tax-free income. Later in retirement, withdrawals could increasingly be taken from the pension fund itself.
The balance between pension and ISA withdrawals is also important when it comes to managing your income tax bill.
You can usually take up to 25% of your pension pot tax-free, capped at £268,275 over your lifetime. The rest is usually taxed as income when you withdraw it. By contrast, withdrawals from an ISA or savings account are tax-free.
Till says: “Taking a large pension withdrawal in one tax year could push you into a higher tax band, while spreading withdrawals over several years may be more tax efficient.
“For many people, using a combination of pension and ISA withdrawals each year can be an effective approach. This allows them to make use of available income tax allowances while also benefiting from the flexibility of tax-free ISA withdrawals.”
Those who retire before claiming their state pension may be able to use their £12,570 annual personal allowance to take some taxable pension income without paying income tax, provided they have no other taxable income using up that allowance.
Laura Ripley, chartered financial planner at BRI Wealth Management, explains how someone could combine withdrawals from their different savings pots to aim for £22,760 per year of spending money in the early years of retirement.
They could withdraw £16,760 from their pension using a so-called uncrystallised fund pension lump sum. Uncrystallised means funds held in respect of a pension scheme member which have not been used to provide that member with a benefit to date.
Of this, £4,190 would be tax-free (25%), and the remaining £12,570 (75%) would be taxable, but covered by their personal allowance.
They could then take £4,000 from their ISA tax-free and use up £2,000 from their cash. This would give them a total of £22,760 to spend per year, without an income tax bill.
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Paying less tax can leave more for your retirement and your beneficiaries. But this strategy would need to be adjusted once you start claiming the state pension..
Ripley says: “This approach would not be sustainable throughout retirement. Spending patterns are often highest in the early, more active years of retirement, when people are travelling and pursuing hobbies.
“A strategy such as this can help meet those higher initial spending needs, but withdrawals would need to reduce over time to help preserve capital and improve the likelihood of the funds lasting throughout retirement.”.
Even if you decide to draw on your pension first, you still need to consider whether to take your tax-free cash as a lump sum or in stages.
Ripley explains: “Taking a lump sum upfront can be appropriate where there is a specific need, such as repaying a loan or funding a significant expenditure. However, withdrawing money unnecessarily removes it from the tax-efficient pension environment.
“For those who do not require a substantial lump sum, taking tax-free cash gradually alongside income withdrawals can offer greater flexibility and allow a larger proportion of the pension to remain invested for longer,” adds Ripley.
One risk is taking too much taxable income from your pension in a single tax year, potentially pushing you into a higher income tax band. On the other hand, spending cash or ISA savings too quickly could leave you with fewer options later in retirement.
Another danger is having to sell investments when markets fall.
Craig Rickman, personal finance expert at interactive investor, explains: “If you're relying on money in the stock market to cover everyday expenses, a downturn could force you to sell at a loss, leaving less money invested to benefit when markets recover.”
Keeping some cash aside can help you cover everyday spending during periods of market volatility, without having to sell investments at the wrong time. But it’s also important not to leave too much sitting in cash for years, as inflation can eat away at its value.
Finally, if you plan to continue paying into a pension, be aware that taking certain taxable pension withdrawals can trigger the money purchase annual allowance (MPAA). This reduces the amount you can pay into defined contribution pensions and receive tax relief on to £10,000 a year.
The right approach won’t be the same for everyone, as it depends on your income, spending needs and longer-term goals.
If leaving an inheritance is a priority, it’s also worth considering how your choice of withdrawals could affect what your family eventually receives.
Rickman says: “Dying with a large pension could trigger a double tax bill for younger family members – especially if death occurs after age 75 as any unused funds will not only be included in the IHT calculations, but the recipient will pay income tax on withdrawals at their marginal rate.”
For this reason, it can be worth seeking professional financial advice to help you plan your retirement income.
Laura Ripley says: “Cashflow modelling can be particularly valuable in this process, helping retirees visualise how income will be generated from multiple sources over time and demonstrating the long-term impact of different withdrawal strategies.”
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