When saving for retirement, you will likely focus heavily on your pension. The added benefits of employer contributions and tax relief mean that this savings vehicle is very effective.
However, there are limitations to a pension. For example, you can’t normally access your savings until you reach a certain age. There are tax implications to consider when accessing the wealth, too.
That’s why it may be sensible to save and invest outside your pensions, and ISAs are an effective way to achieve this.
As a result, when you approach retirement, you may have wealth in pensions and ISAs, and might wonder in what order you should draw your savings.
Naturally, this depends on your own unique circumstances, and there is no “right” answer about how to draw a retirement income. However, understanding the tax implications of each and how you might combine wealth from both sources could help you make more informed decisions.
Read on to learn more.
You can draw the first 25% of your pension as a tax-free lump sum
Once you reach the normal minimum pension age (NMPA) – normally 55 but rising to 57 from April 2028 onwards – you can start drawing from your private and workplace pensions. In some cases, the NMPA may be lower if you have a protected pension age.
You can typically take the first 25% as a tax-free pension commencement lump sum (PCLS). The amount of tax-free cash you can take in your lifetime is limited by the Lump Sum Allowance (LSA) of £268,275.
The total amount of tax-free cash that can be taken from your pension in your lifetime, and after you pass away, is £1,073,100. This is your Lump Sum and Death Benefits Allowance (LSDBA).
Provided the initial 25% you take falls within the LSA and LSDBA, you won’t pay any Income Tax on it. What’s more, you can take this all in one go or spread it out over several withdrawals.
You will pay Income Tax at your marginal rate on further withdrawals from your pension
Once you’ve used your tax-free lump sum, you could pay Income Tax on any withdrawals from the remaining 75% of your pension. The amount you pay depends on your Income Tax bracket.
The following table shows the current Income Tax thresholds for 2025/26.
As such, the amount of Income Tax you pay depends on the level of income you draw from your pension and other taxable sources each year.
For example, if you had already used your tax-free lump sum and took £30,000 from your pension, you would pay:
- 0% tax on the first £12,570
- The basic rate of 20% on income between £12,571 and £30,000.
This means you’d pay £3,486 in Income Tax.
Bear in mind that in 2025/26, the full State Pension is approximately £11,973 a year, and this is taxable income. Consequently, it may be easy to exceed the Personal Allowance and pay Income Tax if you draw from private pensions on top of this amount.
You won’t pay Income Tax when drawing from your ISAs
The tax rules surrounding ISAs are much simpler than those for pensions.
You won’t pay any Income Tax when drawing from an ISA. You also don’t pay tax on savings interest or investment returns within your ISA, making them an incredibly tax-efficient way to build wealth.
Additionally, you can access your ISAs at any age.
However, the crucial difference is that when you pay into a pension, the employer contributions and tax relief you likely benefit from make it easier to grow your retirement savings far more quickly.
That’s why both pensions and ISAs are an important part of your retirement savings plan, and having both gives you opportunities to draw a more tax-efficient retirement income.
We can explore ways to reduce the tax you pay when drawing on your retirement savings
There are several tax strategies you might employ when planning your retirement income.
First, many pension providers allow you to draw from the tax-free and taxable portions of your pension at the same time, and you can use this to your advantage.
For instance, if you took £20,000 from the taxable portion of your pension, you’d exceed the Personal Allowance and pay some Income Tax. Meanwhile, if you took half from the tax-free portion and the rest from the remaining 75%, your taxable income would be £10,000 (provided this was your only income).
This means you wouldn’t exceed the Personal Allowance and so wouldn’t pay Income Tax.
Similarly, if you took £10,000 taxable income from your pension and then supplemented it with another £10,000 from an ISA, you would remain below the Personal Allowance.
Naturally, you may draw a higher income than this, especially if you also claim State Pension payments, so you might not circumvent Income Tax altogether.
However, this example demonstrates how strategic use of pensions and ISAs together could make it easier to manage your tax liability. Crucially, this means you retain more of your wealth and can fund your desired retirement lifestyle for longer.
Get in touch
If you are planning your retirement income, please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.