Which retirement pot should you use first?

09/10/2026

If you have spent decades saving for retirement, the chances are you have built up money across several different places: a pension, an ISA, perhaps some cash savings, or other investments. When the time comes to start drawing an income, one of the most important questions you will face is: which pot do I take from first?

It sounds straightforward, but getting this wrong can cost you significantly in tax and the right answer is different for everyone.

Why strategies that worked before may not work now

For the best part of a decade, many retirees followed a broadly similar playbook: draw on cash and ISA savings first, keep the pension intact for as long as possible, and let it pass to family largely free of Inheritance Tax when the time came. It was a logical, tax-efficient approach, and for a long time, it worked well.

But the landscape has shifted considerably, and several changes are combining to make a fresh look at retirement income planning more important than ever.

Pensions are losing their Inheritance Tax exemption

From April 2027, most unused defined contribution pension funds and pension death benefits will be brought into scope for Inheritance Tax, with limited exceptions such as death-in-service benefits. This is arguably the most significant change to pension planning in a generation. For many people, the pension was the cornerstone of their estate plan, a pot preserved specifically to pass wealth to the next generation. That assumption can no longer be taken for granted, and the question of when and how to draw from the pension needs to be reconsidered as a result.

Frozen tax thresholds are pulling more people into higher tax bands

Income tax thresholds have been frozen since 2021 and are set to remain frozen until at least 2031. As wages, pensions, and investment income rise with inflation, more people find themselves paying tax at 40%, or seeing their personal allowance reduced, without any change to the headline rates. This process, known as fiscal drag, means the tax cost of getting withdrawal sequencing wrong is quietly rising every year.

Capital Gains Tax has become more expensive

Capital Gains Tax (CGT) rates on investments rose in recent years and the annual exempt amount, the gain you can make before CGT applies - has been cut sharply, from £12,300 in 2022/23 to just £3,000 (from April 2024).. For retirees holding assets in general investment accounts, the tax cost of selling to fund income is now meaningfully higher than it was a few years ago. This makes ISA and pension drawdown relatively more attractive by comparison, but adds further complexity to the sequencing decision.

People are living longer

Retirement can now span 25 to 30 years or more. A strategy that looks tax-efficient over five years may look very different over 30, particularly as the tax landscape continues to evolve. Longer retirements also increase the likelihood of significant care costs, which can reshape the financial picture entirely.

The result is that there is no longer a single ‘right’ order in which to draw from your savings. The optimal strategy depends on your individual circumstances and it is worth reviewing more often than many people realise.

Why the order matters

Different savings ‘wrappers’ are taxed in different ways.

Pensions give you 25% of your pot tax-free (up to a cap), but the rest is taxed as income when you withdraw it.
ISAs are completely tax-free - every penny you take out is yours to keep, with no tax to pay.
General investment accounts may trigger Capital Gains Tax when you sell investments that have grown in value.
Cash savings generate interest, which is taxable above a certain threshold.

Because of these differences, the sequence in which you draw down your savings can make a meaningful difference to how much tax you pay over the course of your retirement.

A simple example

Imagine you are 68, with a pension worth £300,000, an ISA worth £100,000, and cash savings of £50,000. You need £30,000 a year to live on, on top of your State Pension.

Here is something that catches many people by surprise: the full State Pension (currently £12,547.60 a year) uses up almost all of your tax-free personal allowance on its own. That means nearly every pound you then withdraw from your pension on top of that is taxable.

If you draw all £30,000 from your pension, your income tax bill would be roughly £6,000 a year - because almost the entire £30,000 is taxable once your State Pension has used up your personal allowance.
If you draw £15,000 from your pension and £15,000 from your ISA instead, your tax bill falls to around £3,000 - a saving of approximately £3,000 a year. Your ISA income is completely tax-free, so every pound you take from it in place of a pension withdrawal is a pound you are not taxed on.

Over a twenty-year retirement, that kind of saving adds up to a significant sum.

Making your money last

Tax efficiency matters, but it is only part of the picture. The other critical question is whether your income strategy is sustainable - in other words, will your money last as long as you need it to?

Retirement can last far longer than many people expect. Someone retiring at 65 today could spend 25 to 30 years in retirement, and planning for that kind of timeframe requires more than just minimising this year's tax bill. There are a few important things to keep in mind:

Spending down one pot too quickly can leave you exposed. If you exhaust your ISA or cash savings early in retirement purely for tax reasons, you lose the flexibility those wrappers provide later - for example, to fund unexpected care costs or a large one-off expense.

Investment growth matters. Money that remains invested has the potential to grow over time, which helps offset the effects of inflation and supports income over a longer period. Withdrawing more than your portfolio can sustain - particularly in the early years of retirement - can permanently reduce its ability to recover.

Inflation erodes purchasing power. £30,000 a year today will not buy the same things in 15 years' time. A good retirement income plan factors in the rising cost of living, not just the income needed right now.

Care costs can be significant. Many people will face care needs later in life, and the costs can be substantial. Preserving some of your savings - particularly tax-efficient ones - gives you options if that situation arises.

It is more complex than it looks

Beyond sustainability, there are several other factors that can complicate the picture:

Taking too much from your pension in one year can push you into a higher tax band.
Leaving your pension completely untouched may now create an Inheritance Tax liability for your family.
The right strategy for a couple is different from the right strategy for a single person.

What should you do next

The key message is this: a good retirement income strategy balances tax efficiency with long-term sustainability. The best approach depends on your full financial picture - your assets, your income, your likely lifespan, your attitude to risk, and your goals for the people you want to leave money to.

If you have not recently reviewed how your retirement savings are structured, now is a good time to do so. A qualified financial adviser can model different scenarios, stress-test your income plan against the unexpected, and help you find a strategy that keeps your money working efficiently - for as long as you need it to.