How to use pensions, ISAs, investments and cash in a sensible order — without wasting allowances or creating unnecessary tax.
Retirement-income planning often starts with one question: how much can the portfolio provide each year?
The rate matters.
So does the source of the income.
Two households with the same wealth, spending and investment returns can pay very different amounts of tax depending on how they use pensions, ISAs, GIAs and cash.
The right approach is rarely to empty one account completely before considering the others.
It is usually an annual plan that blends several accounts, uses the available tax bands across the household and preserves flexibility for later years.
Two retirees are both aged 60. They need the same income and begin with the same wealth. The difference is the order in which the accounts are used.
Retiree A — pension left untouched. Funds the full £40,000 from ISA and GIA. No taxable pension income is taken, so the Personal Allowance is left unused during each of the seven bridge years.
Retiree B — blended annual order. Takes £12,570 a year of taxable pension income within the available Personal Allowance, and the remaining £27,430 from ISA and GIA. The same £40,000 net income is produced.
The £17,598 is not a guaranteed lifetime saving. It illustrates the value of using seven annual Personal Allowances that would otherwise expire. The actual outcome depends on later income, future tax rates, pension growth, State Pension, account balances and personal circumstances.
The planning value comes from using annual allowances deliberately rather than allowing them to disappear unused.
Simplified illustration using 2026/27 England, Wales and Northern Ireland Income Tax allowances held constant for seven years. Scottish Income Tax differs. It ignores investment returns, inflation, charges and changes in tax law. It is not personal advice.
Most retirees arrive at retirement with six or seven different sources of income, each taxed differently. Knowing what each one is for — and what each one costs to draw from — is the foundation for sequencing.
The full new State Pension is £241.30 a week, or £12,547.60 a year, in 2026/27. The amount received depends on the individual's National Insurance record. It is taxable income and uses part or all of the Personal Allowance. The age at which it begins depends on date of birth.
These provide a scheme-defined income, usually for life and sometimes with inflation protection. The income is taxable. Its amount, starting date, increases and survivor benefits are important parts of the wider withdrawal plan.
Withdrawals can normally be taken flexibly once the pension is accessible. Up to 25% of benefits crystallised can usually be paid tax-free, subject to the available lump-sum allowance. The remaining amount is taxable when drawn. Taking taxable flexible pension income will normally trigger the Money Purchase Annual Allowance.
The standard pension lump-sum allowance is currently £268,275, although previous benefits and protected allowances can change the amount available.
ISA subscriptions are generally made from money that has already been taxed. Investment growth and withdrawals within an ISA are then free from UK Income Tax and Capital Gains Tax. ISA assets normally remain part of the estate for Inheritance Tax.
A GIA sits outside a pension or ISA. Withdrawals may contain original capital, dividends and realised gains. Tax depends on the investments, gains, losses, allowances and the household's other income. Annual planning may gradually move assets into ISAs where allowances permit.
We normally hold around three years of the income that the portfolio needs to provide in a separate interest-bearing cash account. Its purpose is risk management rather than investment return. During a serious market fall, it can provide the monthly income while routine investment sales are paused.
Tax, pension and State Pension figures checked against GOV.UK in June 2026. Rules and allowances may change.
Each tax year creates a new set of allowances and tax bands. Most cannot be carried forward if they are unused. The objective is not to avoid all tax in one particular year. It is to manage the household's combined tax position over the whole retirement.
An individual can normally receive up to £12,570 of income before Income Tax is due, although the allowance can be reduced where adjusted net income exceeds £100,000.
State Pension, defined-benefit pension and other taxable income all use part of the allowance. During years with little or no secure income, taxable pension withdrawals may use capacity that would otherwise expire.
An individual normally pays Capital Gains Tax only where total taxable gains exceed the £3,000 annual exempt amount.
A Bed & ISA transaction can realise a gain because the investment is sold before the proceeds are subscribed to the ISA. The transaction must therefore be managed using the available exempt amount, losses and wider tax position.
The first £500 of dividend income is currently charged at a 0% dividend rate. Dividend income still counts when determining the individual's tax band.
Basic-rate taxpayers can normally receive up to £1,000 of savings interest without tax being due. The allowance is £500 for higher-rate taxpayers and nil for additional-rate taxpayers.
These are UK figures for 2026/27. Scottish rates differ for pension and other non-savings income.
The old rule was to spend taxable investments and ISAs first because pensions were generally outside the estate for IHT.
That rule was already too simple.
It could mean leaving Personal Allowances unused for years and building a larger taxable pension for later life.
From 6 April 2027, most unused pension funds and pension death benefits will be included within the value of the deceased person's estate for Inheritance Tax purposes.
That weakens the old assumption that a pension should always be preserved until every other account has been exhausted.
It does not mean that pensions should automatically be drawn first. Spouse exemption, beneficiary taxation, the wider estate, future spending and the available allowances still matter.
The better question is: what combination of pension, ISA, GIA and cash produces the best lifetime outcome for this household?
For many retirees, the answer may include drawing some pension income before State Pension and other secure income begin. The correct amount must be calculated rather than assumed.
A sensible starting point is to consider all the household's accounts together each year and decide which combination provides the required net income with an acceptable current and future tax cost.
Begin with State Pension, defined-benefit pensions, annuities, earnings and other income already in payment.
Consider taxable pension income where the household has unused Personal Allowance or basic-rate capacity and where doing so improves the lifetime plan.
Use ISA withdrawals, available tax-free pension cash, the GIA and other capital in the proportions that fit the plan.
Review gains, losses, dividends and ISA subscriptions across both spouses each tax year.
The war chest supports the monthly income during a serious market fall. It should not normally be exhausted simply because it is the easiest account to access.
The order should be reviewed annually because State Pension begins, tax rules change, spending alters and the relative values of the accounts move.
Most inefficient retirement plans are not dramatically wrong. They lose small amounts of tax or flexibility each year because nobody has agreed a drawing order across the whole household. Repeated for twenty or thirty years, those small decisions can become material.
The decision should be based on the use of the cash, the tax position, investment risk, estate planning and the client's need for flexibility. Neither route is automatically right.
This can make sense where there is a clear use for the money, such as repaying a mortgage, funding a purchase or making an affordable gift.
Once withdrawn, the money is outside the pension wrapper. Interest, dividends and investment gains may then become taxable, depending on where the money is held.
The estate-planning effect also requires individual review, particularly in light of the pension-IHT changes taking effect from April 2027.
Tax-free pension cash can be released alongside taxable pension withdrawals over several years.
This can preserve flexibility and keep unneeded money within the pension until a later date. It may also help create a controlled annual income, but it is not automatically the better option.
The period after work stops and before State Pension or DB income begins can offer unusual flexibility.
There may be little or no other taxable income using the Personal Allowance and basic-rate band.
For some retirees, it can make sense to draw pension income during this window even where all of it is not needed for spending. Where withdrawals exceed current spending, the surplus may be subscribed to ISAs where allowance is available, held in cash, invested through a GIA, spent or gifted as part of the wider plan.
This can smooth taxable income across retirement rather than leaving a large pension to be drawn later alongside secure income.
Before flexible taxable pension income is taken, consider the Money Purchase Annual Allowance. It can materially restrict future defined-contribution pension funding.
The current MPAA is £10,000 and unused MPAA cannot be carried forward.
The aim is not to maximise withdrawals. It is to use the low-tax years deliberately.
One year of the blended order, in numbers. Fictional, but representative of the way the plan actually runs.
The £240,000 war chest represents approximately three years of their current portfolio-funded income.
Sarah crystallises £33,520 of pension benefits. £8,380 is paid as tax-free pension cash and £25,140 is taxable pension income. Assuming a full £12,570 Personal Allowance and a 20% basic rate, the Income Tax is £2,514. Sarah receives £31,006 net.
David follows the same structure and receives £31,006 net after £2,514 of Income Tax.
A further £17,988 is withdrawn from the joint ISAs to bring household net income to the £80,000 target.
Separately from the household income, the GIA is reviewed for gains, losses and available ISA allowances. Where appropriate, investments may be sold and up to £20,000 per spouse subscribed to ISAs. The amount sold is not the same as the capital gain realised, and the CGT position must be calculated before the transaction is completed.
If the agreed market trigger is active, part or all of the monthly income may instead be paid from the war chest while routine investment sales are paused.
Illustrative scenario only, not a recommendation. Calculations use 2026/27 England, Wales and Northern Ireland Income Tax allowances. Scottish Income Tax differs. The example assumes both individuals have their full Personal Allowance and sufficient pension lump-sum allowance. Taxable flexible pension income will normally trigger the Money Purchase Annual Allowance. Actual outcomes depend on tax rules, returns, pension rights, spending and personal circumstances.
The correct drawing order changes over time. State Pension or a defined-benefit pension begins. Spending changes. Markets move. Tax rules alter. One spouse may die. The withdrawal plan must therefore be rebuilt around the current year rather than repeated automatically.
The value comes from a series of small annual decisions made in the right order.
The correct drawing order cannot be established from one account in isolation. These figures provide a useful starting point for reviewing the household as a whole.
Colin Bates · Chapter3 Financial Planning
colin@chapter3fp.co.uk
chapter3fp.co.uk
Financial Guardrails — sustainable income through the market cycle.
Bridging the Gap — early retirement before secure income begins.
Chapter3 Investment Philosophy — how we think about portfolios in retirement.
This guide is general information and does not constitute personal financial, tax or legal advice.
Tax, pension and allowance figures refer to the UK 2026/27 tax year and were checked in June 2026. Scottish Income Tax differs. Tax rules and allowances may change.
State Pension entitlement and starting age depend on the individual's date of birth and National Insurance record.
From 6 April 2027, most unused pension funds and pension death benefits will be included within the value of the deceased person's estate for Inheritance Tax purposes. The detailed result depends on the estate, spouse or civil-partner exemption, beneficiaries and the type of pension benefit.
Investments can fall as well as rise, and clients may receive back less than they invest. Past performance is not a reliable guide to future returns.
Chapter3 Financial Planning Ltd is an Appointed Representative of ValidPath Limited, which is authorised and regulated by the Financial Conduct Authority under FRN 197107. Chapter3 Financial Planning Ltd appears on the FCA Register under reference number 931195.