For the past decade, the standard planning advice was to spend from ISAs and other investments first, leaving the pension untouched for as long as possible because it sat outside the estate for inheritance tax. From April 2027, unused pension funds will be included in the estate for IHT purposes, and the logic that underpinned that default has inverted. But the new answer is not simply “spend the pension first.” It depends on the interaction between income tax, inheritance tax, your beneficiaries’ tax position, your health, and the overall shape of your estate.
What does it mean to draw well in retirement?
For most of the past decade, the answer had a reliable shape. You drew from your ISAs and general investment accounts first. You left the pension until last. The reasoning was straightforward: ISA and investment assets sat inside the estate for inheritance tax purposes. Pension assets did not. Every pound left in the pension was a pound sheltered from IHT on death. Every pound drawn unnecessarily was a pound moved from a tax-free wrapper into a taxable one.
This was not a rule of thumb. It was the considered view of most competent financial planners, and for most clients, it was correct.
From April 2027, it will no longer be automatically correct. And the question I’ve started hearing, “so should I spend the pension first now?”, deserves a more careful answer than most people are giving it.
Why the old order made sense
The pre-2027 spending hierarchy, for most clients with both pension and non-pension wealth, looked something like this:
Draw from cash and bank accounts first. Then general investment accounts. Then ISAs. Then, only when necessary, from the pension.
The pension sat at the bottom because it had three stacking advantages no other wrapper could match. Contributions benefited from tax relief on the way in. Growth was tax-free while invested. And the fund, on death, passed outside the estate, no inheritance tax, regardless of the size of the pot.
That third advantage, the IHT exemption, was the decisive factor in the spending order. It made the pension the most tax-efficient asset to die holding. Which, perversely, made it the least efficient asset to spend in most circumstances, because spending it moved value from an IHT-exempt wrapper into the estate.
What changes in April 2027
From 6 April 2027, unused pension funds will be included in the value of the estate for IHT purposes. The IHT exemption, the third and most decisive advantage of the pension in the spending order, disappears.
The pension still benefits from tax relief on contributions and tax-free growth. But on death, the fund is now aggregated with the rest of the estate. If the total exceeds available nil-rate bands, inheritance tax applies at 40%.
Pension benefits paid to a surviving spouse or civil partner remain exempt under the spousal exemption. But benefits paid to children, grandchildren, or other beneficiaries are now within scope.
And the income tax position remains unchanged: beneficiaries who draw down inherited pension funds pay income tax at their marginal rate. If the member died after age 75, which is the majority of cases, that means 20%, 40%, or 45% depending on the beneficiary’s own income.
The combined effect, as we discussed in our earlier piece on pensions and inheritance tax, can produce effective rates of 64% to 67%, or higher where the pension’s inclusion triggers the loss of the Residence Nil-Rate Band.
The new answer is not “spend the pension first”
It would be tidy if the spending order simply reversed, if “spend the ISA last” became “spend the pension last” and vice versa. But that is not how it works, because the income tax dimension hasn’t changed.
Every pound drawn from a pension is subject to income tax at the member’s marginal rate. Drawing £50,000 from a pension in a year where total income already exceeds £50,270 means paying 40% tax on the withdrawal. Drawing from an ISA in the same year costs nothing in income tax.
So the question is no longer “which wrapper is most IHT-efficient to die holding?” It is now a three-variable optimisation: income tax on withdrawal, IHT on death, and the beneficiary’s tax position on inheritance.
The answer depends on where the variables land for each individual, and that is why no single rule replaces the old one.
The five variables that determine your spending order
1. Your marginal income tax rate in retirement. If your combined income from state pension, defined benefit pensions, and other sources already pushes you into the higher rate band, additional pension drawdown is taxed at 40%. Drawing from ISAs instead avoids this. In this scenario, the ISA may still be the better source for discretionary spending, even though the IHT advantage of the pension has gone.
2. Your estate’s proximity to IHT thresholds. If your estate, now including the pension, comfortably exceeds your available nil-rate bands, drawing the pension down reduces the estate and therefore the IHT bill. The income tax cost of drawing down needs to be compared against the IHT saving from reducing the estate. At 40% IHT and 40% income tax, the trade-off is roughly even, but not quite, because income tax is paid now while IHT is paid on death, and there is a time-value argument for paying the IHT later.
3. Your beneficiaries’ marginal tax rate. If your children are basic-rate taxpayers, they would pay 20% income tax on inherited pension drawdowns. If they are higher or additional rate, they pay 40% or 45%. Where beneficiaries are in lower tax bands than the member, it can still be more efficient to leave the pension undrawn and let the beneficiaries draw it at their lower rate, even after IHT, than for the member to draw it at a higher rate during retirement.
4. The Residence Nil-Rate Band taper. The RNRB (up to £175,000 per person, £350,000 per couple) tapers away for estates above £2 million, reducing by £1 for every £2 above the threshold. The pension’s inclusion in the estate from April 2027 may push estates above this taper point, causing the loss of up to £350,000 in additional nil-rate band. Drawing down the pension to bring the estate below £2 million can, in some cases, save more in RNRB preservation than it costs in income tax.
5. Your health and life expectancy. This is the variable nobody likes to discuss, and it is often the most important one. If life expectancy is shorter than average, the pension may be drawn faster for lifestyle purposes, or left deliberately because the IHT liability is manageable and the income tax cost of rapid drawdown would be high. If life expectancy is long, sustained drawdown at a moderate rate may be the most efficient approach, gradually reducing the estate while keeping income tax within manageable bands.
What this looks like in practice
Consider a retired couple, she is 67, he is 69. Combined estate: £1.8 million excluding pensions. Her DC pension: £450,000. His DC pension: £300,000. Combined state pension and his small DB pension provide a base income of £35,000 per year. Their normal spending is around £50,000 per year.
Under the old rules, they drew the gap (£15,000 per year) from their ISAs. The pensions were left untouched. Total estate on second death including pensions: approximately £2.55 million. IHT exposure under the new rules: meaningful, particularly because the estate exceeds the £2 million RNRB taper threshold.
Under a revised strategy, they might draw £20,000 per year from the pensions instead, staying within the basic rate band for income tax purposes, and leave the ISAs untouched. Over ten years, this draws down £200,000 from the pensions, reducing the estate below the £2 million RNRB taper and preserving the full nil-rate band allowances on second death. The income tax cost is modest (£20,000 × 20% = £4,000 per year). The IHT saving from RNRB preservation alone could be £70,000 or more.
The right answer for this couple is not “spend the pension first.” It is “draw enough from the pension to manage the RNRB taper, without triggering higher-rate income tax, while leaving the ISAs intact for flexibility.” That sentence is why this needs modelling, not a rule of thumb.
The honest answer
The old spending order was simple because the IHT treatment of pensions made one variable dominate the others. That variable has been removed.
The new spending order is individual because no single variable dominates. Income tax, IHT, beneficiary position, RNRB taper, health, all weigh in, and they weigh differently for every household.
For some people, the right answer will be to draw more from the pension than they were planning to. For others, it will be to continue drawing from the ISA. For most, it will be a blended approach, modelled through cashflow software, reviewed annually, and adjusted as circumstances change.
The one answer that is almost certainly wrong is to assume the old order still holds. The landscape has changed. The plan should change with it.
If you haven’t revisited your drawdown strategy since the pension IHT announcement, now, twelve months before the change takes effect, is the time to do it. Not in a rush. In a conversation.
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Frequently asked questions
Should I spend my pension or my ISA first in retirement? There is no longer a single correct answer. Before April 2027, the standard advice was to draw from ISAs first and leave the pension, because pension funds sat outside the estate for inheritance tax. From April 2027, pensions will be included in the estate. The optimal drawdown order now depends on your marginal income tax rate, your estate’s proximity to IHT thresholds, your beneficiaries’ tax rates, the RNRB taper, and your health. This should be modelled individually with a financial planner.
What is the Residence Nil-Rate Band taper and why does it matter? The Residence Nil-Rate Band (RNRB) provides up to £175,000 per person (£350,000 per couple) in additional IHT-free allowance where a home is left to direct descendants. However, it tapers away for estates above £2 million, reducing by £1 for every £2 above the threshold. From April 2027, the pension’s inclusion in the estate may push some estates above this £2 million threshold, causing the partial or full loss of the RNRB. Drawing from the pension to bring the estate below £2 million can preserve this valuable allowance.
Is it ever still right to leave the pension untouched? Yes, in some circumstances. If your beneficiaries are basic-rate taxpayers and your estate, including the pension, remains below the £2 million RNRB taper, leaving the pension and letting beneficiaries draw it at their lower income tax rate may still be efficient. The spousal exemption also means that pensions left to a surviving spouse or civil partner remain IHT-exempt.
How often should I review my drawdown strategy? At least annually. Tax rules, personal circumstances, investment performance, and health can all change the optimal drawdown approach. A cashflow model that was correct last year may need adjusting this year, particularly in the twelve months leading up to the April 2027 pension IHT change.
Tax rules, rates, and allowances referenced in this article are based on the position as at April 2026, with changes taking effect from 6 April 2027. Tax treatment depends on individual circumstances, including estate value, income tax position, pension type, and family structure. The worked example is illustrative only and does not represent any specific client situation. This article is for general information only and does not constitute personal advice. Your own circumstances should be reviewed with a qualified financial planner before acting on any of the points discussed. Juniper Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Firm Reference 973711).
