Retirement planning 22 April 2026 (updated 13 May 2026) 6 min read

Pension first or ISA first? The drawdown-order decision

When you retire with both a pension and an ISA, which one do you draw from first? Most retirement guides skim over this, but the choice can change your tax bill, your inheritance-tax exposure, and how long your money lasts - sometimes by years.

The setup

Imagine you're 67, retiring, with two pots:

• A pension (SIPP or workplace) worth £400,000
• A Stocks & Shares ISA worth £200,000

You need £30,000/year of net income to live on, plus State Pension of about £12,000/year covering some of it. Where do you draw the rest from?

There are three credible answers. None of them is universally right.

Pension first: preserve the ISA's tax-free wrapper

This is the most common default and the model's default setting. The logic:

• Pension withdrawals (the 75% taxable portion) get taxed as income. You're paying 20% on most of it once you cross the Personal Allowance.
• ISA withdrawals are fully tax-free. There's no benefit to taking the ISA out now, because the money is already free of UK income tax and capital gains tax.
• So - the argument goes - drain the taxable pot first while you can manage the marginal rate, and let the tax-free wrapper keep compounding.

The compounding point matters. £200,000 in an ISA growing at 5% real for 10 years becomes about £326,000. The growth is yours; HMRC doesn't get a slice. If you'd drawn the ISA down and left the pension growing instead, that growth happens inside the pension wrapper too - but the eventual withdrawals are taxable, so the effective return is lower.

ISA first: keep the pension growing in its tax-free environment

The opposite case:

• The pension wrapper is also tax-free for growth (no income tax or CGT on returns inside the pension). The pension can compound just as efficiently as the ISA can.
• Until 5 April 2027, UK pensions sit outside your estate for Inheritance Tax (IHT). Beneficiaries can inherit the pension and continue drawing from it under the standard rules. This changes from 6 April 2027 - see below.
• An ISA, by contrast, is inside your estate for IHT. If your total estate exceeds the IHT threshold (£325,000 nil-rate band plus £175,000 residence nil-rate band if applicable), the ISA gets taxed at 40% on the way to beneficiaries.
• So - while the pension IHT exemption still applies - the argument goes: drain the ISA first to reduce your IHT exposure, and preserve the pension for its tax efficiency on death.

Until April 2027 the IHT angle is the strongest argument for ISA-first. If you have meaningful inheritance considerations - an estate already approaching or above the nil-rate bands - preserving the pension for the next generation is currently valuable.

Important change from 6 April 2027: at Autumn Budget 2024 the government announced that unused pension funds and most death benefits from registered pension schemes will be brought into the value of a person's estate for Inheritance Tax purposes from 6 April 2027. After that date, the IHT advantage that currently makes “ISA first” attractive largely disappears - both pots sit inside the estate, both potentially taxed at 40% if the estate exceeds the nil-rate bands.

In practical terms: if you're modelling a retirement that mostly happens after April 2027, the IHT argument for ISA-first is materially weaker. The remaining factors - tax efficiency of withdrawals, marginal-rate management on the taxable 75%, and the 25% tax-free cash mechanic - become the deciding considerations instead.

The 25% sweet spot (the third option)

A common real-world strategy that the simple “pension first vs ISA first” binary misses: take the 25% tax-free portion from the pension up front, move it to your ISA, and then live off the ISA for the early retirement years before crystallising more pension later.

The mechanics:

1. At retirement, crystallise £200,000 of pension. 25% = £50,000 comes out as tax-free cash. Move it to the Stocks ISA (subject to the £20,000/year ISA contribution limit, so this would take multiple years to fully shift, or it lands in the General Investment Account).
2. Live off ISA withdrawals for several years. Zero income tax. State Pension counts toward Personal Allowance but doesn't exceed it for most retirees, so it stays tax-free in practice.
3. Crystallise more of the pension only when you actually need to, ideally in years where your other income is lower so the taxable 75% portion falls in the basic-rate band.

This strategy uses the Lump Sum Allowance efficiently across multiple years, manages the marginal tax rate, and still preserves the pension for as long as possible.

In Excelergy, you can model this in two ways. For a one-off chunk (“crystallise £200,000 at age 60 and move the £50,000 TFC to a Stocks ISA”), add a Crystallisation event at the chosen age. For an ongoing strategy where each year's auto-crystallised 25% is redirected to an ISA, set the Auto-cryst TFC dropdown in the Spending card (Advanced view) to Cash ISA or Stocks ISA. The redirection honours the £20,000 annual ISA allowance, with any overflow going to the Current Account.

Comparing the two defaults in Excelergy

The planner's Drawdown source setting in the Spending card toggles between “Pension first” (default) and “ISA first”. To compare them honestly, the easiest approach is to clone your scenario:

1. Open the planner with your real numbers.
2. In the Scenario card, click New and name it “ISA first”.
3. Copy your inputs to the new scenario (or use Load samples and adjust).
4. Set Drawdown source to ISA first.
5. Run the plan. Compare the year-by-year ledger and end-of-life pot balances between the two scenarios.

Pay attention to:

• End-of-life total pot. Which scenario leaves more behind for beneficiaries?
• Total tax paid. The Deductions group in the ledger sums income tax + NI year by year.
• Whether either pot runs out. A scenario that depletes the pension early but the ISA late may need a different drawdown rate to be safe.

What usually wins

Honest answer: it depends on your situation, but some patterns hold:

• If your estate is well below the IHT threshold and you don't expect to leave a meaningful inheritance, pension first usually wins on tax efficiency and pot longevity.
• If your estate is near or above the IHT threshold and your planning window is mostly before April 2027, ISA first temporarily protects the pension's IHT exemption. After the 6 April 2027 rule change this advantage largely disappears.
• If your retirement is long (e.g. retiring at 55, planning to 95+) the tax-free compounding of the ISA over decades makes pension first particularly attractive.
• For most people, the 25%-to-ISA strategy at retirement age (crystallise some pension, move the tax-free portion to ISA, then ISA-first for a few years) splits the difference cleverly.

The single-toggle answer in the planner is a simplification. The real planning question is which order you crystallise events in, and the model lets you mix in crystallisation events at specific ages to test more nuanced patterns than the binary toggle alone can express.