What our research found
40%
Since April 2027, pension death benefits are within scope of inheritance tax at 40%. For a £300,000 pension pot, that is up to £120,000 potentially going to HMRC rather than your heirs.
2027
Since April 2027, unused pension pots count towards your estate for inheritance tax. This single change reverses the logic of every generic withdrawal strategy written before this date.
Margaret is 65, newly retired, and needs £24,000 per year. Her state pension is £12,548, so she has a £11,452 annual gap. She has a DC pension pot of £300,000 and a cash ISA of £100,000. Both grow at 7% annually.
She does not need to draw from her pension immediately. Her question: should she draw from her ISA first (the traditional advice) or her pension first?
Note: This example assumes Margaret lives to age 82 (17 years of retirement).
Margaret draws £11,452 per year from her ISA to top up her state pension. With 7% annual growth, her ISA lasts approximately 9 years (£100,000 compounding at 7% while withdrawing £11,452 annually), until she reaches age 73.
From age 74 to 82 (9 years), she draws £11,452 per year from her pension. Using UFPLS (Uncrystallised Funds Pension Lump Sum), she maximises her tax-free cash entitlement over the pension withdrawal years.
Results: £3,314 in income tax paid over 9 years. Final pension balance: £397,961. ISA depleted: £0.
Inheritance tax on death: (£397,961 - £325,000) × 40% = £29,184.
Total tax paid (income tax + IHT): £3,314 + £29,184 = £32,499.
Net to heirs: £368,776.
Margaret draws £11,452 per year directly from her pension from age 65 to 82 (17 years). Her ISA remains untouched and continues growing at 7%.
Using UFPLS, she maximises her tax-free cash entitlement over the pension withdrawal years, significantly reducing her income tax burden.
Results: £23,888 in income tax paid over 17 years. Final pension balance: £594,462. ISA grown to: £315,882.
Total estate: £594,462 (pension) + £315,882 (ISA) = £910,344.
Inheritance tax on death: (£910,344 - £325,000) × 40% = £234,138.
Total tax paid (income tax + IHT): £23,888 + £234,138 = £258,026.
Net to heirs: £676,206.
How each strategy affects your ISA and pension balances throughout retirement.
The underlying data showing ISA and pension balances for each strategy across retirement years.
| Age | ISA First Strategy | Pension First Strategy | ||||
|---|---|---|---|---|---|---|
| ISA | Pension | Total | ISA | Pension | Total | |
| 65 | £88,548 | £280,374 | £368,922 | £100,000 | £288,548 | £388,548 |
| 66 | £83,294 | £280,374 | £363,668 | £107,000 | £297,294 | £404,294 |
| 67 | £77,673 | £280,374 | £358,047 | £114,490 | £306,653 | £421,143 |
| 68 | £71,658 | £280,374 | £352,032 | £122,504 | £316,667 | £439,171 |
| 69 | £65,222 | £280,374 | £345,596 | £131,080 | £327,381 | £458,461 |
| 70 | £58,336 | £280,374 | £338,710 | £140,255 | £338,846 | £479,101 |
| 71 | £50,967 | £280,374 | £331,341 | £150,073 | £351,113 | £501,186 |
| 72 | £43,083 | £280,374 | £323,457 | £160,578 | £364,239 | £524,817 |
| 73 | £34,647 | £280,374 | £315,021 | £171,819 | £378,284 | £550,103 |
| 74 | £25,620 | £280,374 | £305,994 | £183,846 | £393,312 | £577,158 |
| 75 | £15,961 | £280,374 | £296,335 | £196,715 | £409,392 | £606,107 |
| 76 | £5,627 | £280,374 | £286,001 | £210,485 | £426,597 | £637,082 |
| 77 | £0 | £280,374 | £280,374 | £225,219 | £445,007 | £670,226 |
| 78 | £0 | £300,000 | £300,000 | £240,985 | £464,705 | £705,690 |
| 79 | £0 | £321,000 | £321,000 | £257,853 | £485,783 | £743,636 |
| 80 | £0 | £343,470 | £343,470 | £275,903 | £508,335 | £784,238 |
| 81 | £0 | £367,513 | £367,513 | £295,216 | £532,467 | £827,683 |
| 82 | £0 | £397,961 | £397,961 | £315,882 | £594,462 | £910,344 |
How each strategy breaks down between income tax during retirement and inheritance tax on death.
The final amount your heirs inherit after all taxes are paid.
Despite paying £225,527 more in total tax, Strategy B leaves heirs £307,430 more. The key insight: the ISA compounds uninterrupted for 17 years in Strategy B (£100,000 → £315,882), dramatically offsetting the higher tax bill.
Strategy A (ISA first): Total tax burden of £32,499 (£3,314 income tax + £29,184 IHT). Heirs receive £368,776 net.
Strategy B (Pension first): Total tax burden of £258,026 (£23,888 income tax + £234,138 IHT). Heirs receive £676,206 net.
Strategy B pays £225,527 more in total tax but leaves heirs £307,430 more. The trade-off favors Pension First for those prioritising legacy.
Note: ISAs are subject to inheritance tax as part of the estate. The key 2027 change is that pensions, previously exempt, are now also subject to IHT. This fundamentally shifts the legacy planning calculus.
This is why withdrawal order is now a legacy planning decision as much as a tax efficiency one. The traditional "ISA first, pension last" rule was established when pensions were not subject to IHT. Both of those facts have changed. The right answer depends on your state pension, your other income, your health, and what you want to leave behind.
The data below can be copied into a spreadsheet to verify all calculations. Parameters: Age 65-82, Annual Need £24,000, State Pension £12,548, Annual Gap £11,452, Pension Pot £300,000, ISA £100,000, Growth 7%, Tax-Free Entitlement £75,000 (25%).
| Age | Strategy A: ISA | Strategy A: Pension | Strategy A: Total | Strategy B: ISA | Strategy B: Pension | Strategy B: Total |
|---|---|---|---|---|---|---|
| 65 | £88,548 | £280,374 | £368,922 | £100,000 | £288,548 | £388,548 |
| 66 | £83,294 | £280,374 | £363,668 | £107,000 | £297,294 | £404,294 |
| 67 | £77,673 | £280,374 | £358,047 | £114,490 | £306,653 | £421,143 |
| 68 | £71,658 | £280,374 | £352,032 | £122,504 | £316,667 | £439,171 |
| 69 | £65,222 | £280,374 | £345,596 | £131,080 | £327,381 | £458,461 |
| 70 | £58,336 | £280,374 | £338,710 | £140,255 | £338,846 | £479,101 |
| 71 | £50,967 | £280,374 | £331,341 | £150,073 | £351,113 | £501,186 |
| 72 | £43,083 | £280,374 | £323,457 | £160,578 | £364,239 | £524,817 |
| 73 | £34,647 | £280,374 | £315,021 | £171,819 | £378,284 | £550,103 |
| 74 | £25,620 | £280,374 | £305,994 | £183,846 | £393,312 | £577,158 |
| 75 | £15,961 | £280,374 | £296,335 | £196,715 | £409,392 | £606,107 |
| 76 | £5,627 | £280,374 | £286,001 | £210,485 | £426,597 | £637,082 |
| 77 | £0 | £280,374 | £280,374 | £225,219 | £445,007 | £670,226 |
| 78 | £0 | £300,000 | £300,000 | £240,985 | £464,705 | £705,690 |
| 79 | £0 | £321,000 | £321,000 | £257,853 | £485,783 | £743,636 |
| 80 | £0 | £343,470 | £343,470 | £275,903 | £508,335 | £784,238 |
| 81 | £0 | £367,513 | £367,513 | £295,216 | £532,467 | £827,683 |
| 82 (Final) | £0 | £397,961 | £397,961 | £315,882 | £594,462 | £910,344 |
Income Tax: £3,314
IHT: £29,184
Total Tax: £32,499
Net to Heirs: £368,776
Income Tax: £23,888
IHT: £234,138
Total Tax: £258,026
Net to Heirs: £676,206
Note: Strategy A ISA depleted at age 73, pension withdrawals begin at age 74 after ISA depleted. Strategy B pension withdrawals span full 17 years (65-82). ISA compounds at 7% when untouched. UFPLS provides 25% tax-free, 75% taxable. Personal allowance of £12,570 less state pension of £12,548 leaves £22 taxable allowance annually.
Tax-efficient assets should outlast tax-inefficient ones
ISAs are permanently tax-free. Withdrawals hit your pocket with zero income tax, zero capital gains tax, and no inheritance tax complications (beyond being part of your estate). There is no deadline, no minimum withdrawal requirement, and no tax trigger.
Pensions have a 25% tax-free lump sum, but the remaining 75% is taxed as income when you draw it. And since April 2027, unused pension pots sit within your estate for IHT purposes.
The traditional advice is backwards for many retirees. Depleting the ISA early means drawing more from the pension in later years. Pension withdrawals are taxed as income. The ISA, by contrast, is the only asset you can draw from completely tax-free without affecting your marginal tax rate.
Preserve the ISA as the last asset drawn, not the first. The ISA is the last dollar that should be spent, not the first. This is especially true if you are married and the survivor will inherit the ISA tax-free.
Based on actual scenario
Robert is 70, retired, and needs £12,000 per year from his savings on top of his state pension. He has a DC pension pot of £145,900 and a cash ISA of £63,365. Both grow at 5% annually.
Note: This example assumes Robert lives to age 82 (12 years of retirement). The state pension is assumed to cover his other living expenses, so only £12,000/year is drawn from his retirement accounts.
Pension Pot
£145,900
ISA Balance
£63,365
Annual Drawdown
£12,000
Robert draws £12,000 per year from his ISA. His ISA lasts approximately 5.3 years (£63,365 ÷ £12,000), until he reaches age 75.
From age 75 to 82 (7 years), he draws £12,000 per year from his pension. Using UFPLS, he takes 25% tax-free cash and 75% as taxable income.
Results: Final pension balance: £183,247. ISA depleted: £0.
Total estate: £183,247. Inheritance tax on death: £0 (below nil-rate band of £325,000).
Net to heirs: £183,247.
Robert draws £12,000 per year directly from his pension from age 70 to 82 (12 years). His ISA remains untouched and continues growing at 5%.
Using UFPLS, he maximises his tax-free cash entitlement over the pension withdrawal years, reducing his income tax burden.
Results: Final pension balance: £103,582. ISA grown to: £113,589.
Total estate: £103,582 + £113,589 = £217,171.
Net to heirs: £217,171.
Strategy A (ISA first): Final estate £183,247. ISA depleted by age 75. Heirs receive £183,247.
Strategy B (Pension first): Final estate £217,171. ISA preserved and grew. Heirs receive £217,171.
Strategy B leaves £33,924 more for heirs, a 19% improvement, with no additional complexity.
Note: Neither scenario triggers significant IHT as the total estate is below the nil-rate band of £325,000. The benefit of Strategy B here comes from the ISA continuing to compound tax-free while the pension is drawn down.
Parameters: Age 70-82, Annual Need £12,000, Pension Pot £145,900, ISA £63,365, Growth 5%. Strategy A: ISA drawn first; Strategy B: Pension drawn first, ISA preserved.
| Age | Strategy A: ISA | Strategy A: Pension | Strategy A: Total | Strategy B: ISA | Strategy B: Pension | Strategy B: Total |
|---|---|---|---|---|---|---|
| 70 | £54,533 | £145,900 | £200,433 | £63,365 | £145,900 | £209,265 |
| 71 | £45,260 | £145,900 | £191,160 | £66,533 | £141,195 | £207,728 |
| 72 | £35,523 | £145,900 | £181,423 | £69,860 | £136,255 | £206,115 |
| 73 | £25,299 | £145,900 | £171,199 | £73,353 | £131,068 | £204,421 |
| 74 | £14,564 | £145,900 | £160,464 | £77,021 | £125,621 | £202,642 |
| 75 | £3,292 | £145,900 | £149,192 | £80,872 | £119,902 | £200,774 |
| 76 | £0 | £145,900 | £145,900 | £84,915 | £113,897 | £198,812 |
| 77 | £0 | £145,900 | £145,900 | £89,161 | £107,592 | £196,753 |
| 78 | £0 | £145,900 | £145,900 | £93,619 | £100,972 | £194,591 |
| 79 | £0 | £145,900 | £145,900 | £98,300 | £94,021 | £192,321 |
| 80 | £0 | £145,900 | £145,900 | £103,215 | £86,722 | £189,937 |
| 81 | £0 | £145,900 | £145,900 | £108,376 | £79,058 | £187,434 |
| 82 (Final) | £0 | £183,247 | £183,247 | £113,589 | £103,582 | £217,171 |
ISA Depleted: Age 75
Final Pension: £183,247
Net to Heirs: £183,247
ISA Preserved and Grown
Final Pension: £103,582
Net to Heirs: £217,171
Note: Strategy A pension withdrawals begin at age 76 after ISA depleted at age 75. Strategy B pension withdrawals span full 12 years (70-82). ISA compounds at 5% when untouched. Pension drawn via UFPLS (25% tax-free, 75% taxable). Numbers rounded to nearest pound.
The retirement withdrawal paradox
The conventional wisdom said pension last, ISA first. But drawing from your ISA first means your pension grows and remains in your estate, potentially creating a larger IHT liability. Drawing from your pension during your lifetime reduces the estate but triggers income tax. The optimal order inverts the old rule for many retirees.
Generic withdrawal strategies ignore what actually matters: your state pension date, your health, whether you will work part-time. These factors completely change the optimal order.
Since 2027, unused pension pots are within the scope of inheritance tax. This changes the calculus entirely. Drawing down your pension during your lifetime can reduce what is subject to IHT on death, making the timing of withdrawals a legacy planning decision as well as a tax efficiency one.
The financial industry profits from complexity. Simple, specific guidance on withdrawal order is not profitable. So retirees are left guessing.
What the data shows
40%
IHT rate now applied to unused pension pots since April 2027
55-57
Current minimum pension access age, rising to 57 in 2028
Key factors that determine your optimal order
The conventional wisdom was written for a world before April 2027. For decades, the advice was simple: save into your pension, draw from your ISA first in retirement. That advice was sound when pensions were outside the scope of inheritance tax. Since April 2027, that logic no longer holds. The optimal withdrawal order depends on your state pension, your life expectancy, and how you want to balance retirement income against what you leave behind.
Not more information. Clarity.
Not a generic rule. Your actual numbers, your actual situation, your actual optimal withdrawal sequence for this tax year.
Not someday. This month. One specific action based on your actual numbers that will reduce your tax bill starting now.
This analysis was conducted by Delphina, the UK platform for personal financial clarity. Delphina helps retirees understand the optimal withdrawal strategy for their specific situation, factoring in the April 2027 inheritance tax change that brought pension pots within the scope of IHT. This research is based on scenario modelling using current HMRC and DWP rules.
February to April 2026
This research is based on scenario modelling, not empirical data collection:
Withdrawal sequences were modelled across:
Tax calculations based on 2025/26 tax year rules including personal allowance, income tax bands, and inheritance tax rules as amended by the Finance Act 2024 and Finance Act 2025. The April 2027 extension of IHT to pension death benefits is incorporated throughout. All figures are based on publicly available HMRC and DWP guidance.
Delphina (2026). UK Retirement Withdrawal Mistakes 2026. Available at: https://delphina.money/research/uk-retirement-withdrawal-tax-2026
"The rule pension last, ISA first was sound until April 2027. Now the optimal order is personal, and the stakes are higher than ever."
Delphina Research, April 2026