Reordering Your Retirement Drawdown Under the New Rules

You are 58. You have done the right things. You paid into a workplace pension for twenty-five years, you used your ISA allowance most years, and you own the house you raised the children in. You are not wealthy by City standards. You are doing fine. You thought you were sorted.

Then the April 2027 Inheritance Tax change landed, and the order in which you plan to spend your money stopped being obvious. What used to be a quiet, technical question, pension first or ISA first, is now the question that decides whether your family pays £240,000 of tax or £30,000.

This is the piece for you if you are 55 to 65, have a defined contribution pension above £300,000, and have been quietly assuming the order in which you draw it down does not matter. It now does.

The Old Logic, In One Sentence

A defined contribution pension sat outside your estate for Inheritance Tax. Anything you did not draw down during your lifetime passed to your nominated beneficiaries free of IHT. The financial incentive was to leave the pension invested for as long as possible and draw the ISA and savings accounts down first. That kept the IHT-protected wrapper full and let it continue to grow for the next generation.

If you read a retirement guide written any time in the last fifteen years, that is the logic it told you to follow. It was correct then. It is not correct now.

The New Logic, In One Sentence

From 6 April 2027, most unused DC pension funds and most lump sum death benefits form part of your estate for Inheritance Tax. A pound left in the pension wrapper at the date of death is now taxed the same way as a pound left in a savings account. The old wrapper advantage is gone.

That means a pound drawn out of the pension during your lifetime is now worth more, in tax terms, than a pound left inside the wrapper at death. Every £1 you take from the pension while you are alive is a £1 that drops out of your estate for IHT. Every £1 you leave inside is a £1 the estate has to find 40p for, on the excess above your allowances.

Meet Sarah

Sarah is 58. She is not a real person. She is the kind of person the April 2027 change was written for. Her numbers:

Sarah is thinking about retiring at 60 and crystallising her pension. She has enough in her ISA and pension combined that she does not need to worry about running out. The question she is asking is not "how much can I draw a year?" It is "in what order should I draw it?"

What The Numbers Look Like Under The Old Logic

Under the rules that apply before 6 April 2027, Sarah's pension sits outside her estate. She has the option to leave it invested and draw only what she needs from her ISA. If she dies at 75 with the pension intact, the pot passes to her nominated beneficiaries free of Inheritance Tax.

Her indicative estate at that point:

£200,000 of Inheritance Tax. The £600,000 pension passes outside, so the family receives the pension on top.

What The Same Numbers Look Like Under The New Rules

Sarah dies at 75 in 2043, after 6 April 2027. The pension is inside her estate. Nothing else about her situation has changed.

£440,000 of Inheritance Tax. That is £240,000 more than under the old rules, on the same retirement plan, because the pension has moved inside the IHT net.

The New Drawdown Order

Once the pension is inside the estate, the order in which Sarah draws her money down starts to matter. There are three reasonable approaches. One is clearly better for someone in Sarah's position.

Approach 3, With Sarah's Numbers

Sarah retires at 60. She crystallises her £600,000 pension and moves it into drawdown. She chooses to take £40,000 a year from the pension to cover her living expenses, and she leaves the £400,000 ISA untouched.

The pension income is taxable, but at her income level most of it falls in the basic rate band. The ISA continues to compound at whatever return she has it invested for. The pension continues to grow on the part she has not drawn down, but on a smaller base each year.

Assuming 5% growth on what is left invested and 5% growth on the ISA, after fifteen years the picture is roughly:

The headline IHT figure under Approach 3 looks larger than Approach 1, but it is being compared unfairly. Approach 1 left the £600,000 pension in place and let Sarah die with a £900,000 estate. Approach 3 has shrunk the pension, grown the ISA, and the family has received £600,000 of pension income along the way, money that was spent on living, holidays, helping the children, and ordinary life.

The fairer comparison is on the same starting point. Same £600,000 pension, same £400,000 ISA, same property. Under Approach 3 the IHT bill is lower because the pension is materially smaller by the time of death. The ISA carries the same nil-rate band treatment. The estate shape is different, and the inheritance is different, but the family is paying tax on a smaller IHT base.

What This Does Not Mean

Approach 3 is not the right answer for everyone. There are real reasons to use the ISA first instead.

• If you expect to live a long time, the pension keeps growing inside a tax-efficient wrapper. Drawing it down too quickly can run the pension dry before you do.
• If you have a DB (final salary) pension as well as a DC pot, the maths is different and the DB scheme is largely unaffected by the April 2027 change.
• If your income tax position is awkward, taking more pension income can push you into a higher tax band than you need to be in.
• If you might qualify for a married couple's allowance in the future, the second-death maths changes the answer.
• If the pension is small enough that it does not affect your IHT position, the new rule is irrelevant and the old logic still works.

The new drawdown order is right for households whose combined pension and ISA would otherwise take them above the £1 million combined nil-rate band allowance. For households comfortably below that line, the urgency is lower and the trade-offs matter less.

A Note On The 25% Tax-Free Lump Sum

When Sarah crystallises her pension at 60, she can take up to 25% of the pot as a tax-free lump sum. On a £600,000 pension, that is £150,000. The right question is what to do with it.

Three options, with the new rules in mind:

• Pay it into the ISA. The £20,000 annual ISA limit caps how much can move this year. £20,000 in, £130,000 sits in a taxable account until it can be paid in over future tax years. Tax-efficient, but slow.
• Spend it. Clear the mortgage if there is one. Fund a once-in-a-lifetime thing. Reduce the estate by £150,000 straight away.
• Leave it in drawdown. Keep it invested inside the pension wrapper and draw it down over time. With the new rules, leaving it in drawdown means it stays inside the IHT calculation. Less compelling than it used to be.

What To Do This Month

The decision this month is not to change the drawdown order. It is to know which order is right for your situation. Three steps, in this order.