What order should you draw from your SIPP, ISA and taxable accounts?

01 Why 'pension last' became the default

Pensions were left until last because of one rule: money still inside a pension when you died sat outside your estate for Inheritance Tax, and before 75 could pass to beneficiaries free of Income Tax as well. That combination made an untouched pension the most tax-efficient asset a UK household could die holding, and every other ordering decision fell out of it.

The logic was sound while the rule held. Spending an ISA reduced a taxable estate; spending a pension reduced an exempt one. So households were told to run down general investment accounts, then ISAs, and to touch the pension only when nothing else was left.

The government has announced that unused pension funds will be brought within the Inheritance Tax net from April 2027. That removes the asymmetry the whole default was built on, and it means the ordering question has to be answered again from first principles rather than inherited.

Source: Inheritance Tax

02 The three accounts and what each one costs to spend

A pension is taxed on the way out at your marginal rate, with a quarter available tax free. An ISA is taxed on neither the way in nor the way out. A general investment account is taxed as you go — dividends above the £500 allowance, and Capital Gains Tax on disposals above the annual exempt amount.

The marginal cost of spending £10,000 therefore differs sharply. From an ISA it costs £10,000. From a pension for someone with unused personal allowance it costs £10,000, because no tax arises. From the same pension for a higher-rate taxpayer it costs £16,667 of pension value. And from a taxable account it costs £10,000 plus whatever gain is realised in the process.

That is the whole decision in one paragraph: the pension is the cheapest account to spend in a year when your other income is low, and the most expensive in a year when it is high. The ordering question is really a timing question.

Source: Tax on your private pension contributions

03 The baseline order for most households

Draw enough pension income each year to use your personal allowance and, where the plan needs it, the basic-rate band. Take the rest of your spending from ISAs. Use the general investment account to realise gains up to the annual exempt amount each year, whether or not you need the money, because that exemption expires.

This inverts the old default in the years that matter most — the gap between stopping work and State Pension age, when other income is at its lowest. Nine years of unused personal allowance is over £113,000 of pension income that could have come out untaxed and did not, and no later decision recovers it.

It also smooths the pension down before the State Pension arrives and consumes the allowance permanently. The State Pension is not optional income; once it starts, the cheap band is gone.

On the defaults above, the worked example shows £3,486. £12,570 can come out of the pension with no tax at all; funding the remaining £17,430 from ISA avoids £3,486 of Income Tax.

Source: Income Tax rates and Personal Allowances

04 Where the baseline breaks

Three situations change it. If you are still contributing to a pension, taking taxable pension income triggers the money purchase annual allowance and caps future contributions at £10,000 — so the sequencing has to respect that and tax-free cash or small pots are the safer routes. If you are on or near means-tested benefits, pension income counts and ISA capital counts differently, and Pension Credit arithmetic dominates everything else.

And if your estate is comfortably below the nil-rate bands, Inheritance Tax is not a live consideration at all, so the April 2027 change does not affect you. Roughly one estate in twenty pays Inheritance Tax; for the other nineteen this whole chapter is noise and the answer is purely about Income Tax.

The fourth case is a large pot with a spouse. Coordinating two personal allowances across a household is worth more than optimising one, and the transferable allowance is the smallest version of that idea.

Source: Pension Credit

05 The Inheritance Tax side after April 2027

Once unused pension funds count toward the estate, a pension left untouched is taxed twice on the same money for a beneficiary who is not a spouse: Inheritance Tax at 40% on the fund, and Income Tax at the beneficiary's marginal rate when they draw it. That combination is what makes deliberate drawdown during life the cheaper path for larger estates.

The Institute for Fiscal Studies measured the behaviour the old rule produced, and it was exactly what you would predict — pensions being preserved rather than spent, specifically for the exemption. Removing the exemption removes the reason.

For smaller estates nothing changes. Nil-rate bands of £325,000 each, plus the residence nil-rate band where a home passes to direct descendants, leave most households outside the charge entirely.

Source: Passing on a home

06 Doing it every year, not once

This is an annual exercise rather than a plan you make at retirement. Each year you have a fresh personal allowance, a fresh basic-rate band, a fresh Capital Gains Tax exemption and a fresh ISA allowance, and each of them expires unused. The households that end up paying least are the ones that spend twenty minutes each March deciding which allowances still have room in them.

The mechanical version: work out your other income for the year, draw pension up to the top of the band you are willing to pay, top up spending from ISA, and realise gains in the general account up to the exemption. Reinvest anything you did not need through a Bed and ISA so the money moves into a wrapper rather than sitting exposed.

None of this is aggressive and none of it needs a scheme. It is using allowances that Parliament granted, in the year they were granted.

Source: Capital Gains Tax allowances

07 What to check before you change anything

Establish four numbers: your taxable income excluding pension withdrawals, your remaining personal allowance, whether the money purchase annual allowance has been triggered, and whether your estate is above the nil-rate bands available to it. Those four decide the ordering, and none of them requires a projection.

Then check the interaction with anything means-tested, because that overrides the tax arithmetic wherever it applies. A household on Pension Credit should not be optimising Income Tax; it should be protecting entitlement.

This is also the point at which advice earns its fee. The ordering question spans Income Tax, Capital Gains Tax, Inheritance Tax and pension rules simultaneously, and the April 2027 change is recent enough that a lot of published material still assumes the old default.

Source: Plan your retirement income