{"id":23142,"date":"2025-10-24T10:37:48","date_gmt":"2025-10-24T10:37:48","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/insights\/isa-or-pension-which-should-i-take-first\/"},"modified":"2026-06-26T21:10:03","modified_gmt":"2026-06-26T21:10:03","slug":"isa-or-pension-which-should-i-take-first","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/insights\/isa-or-pension-which-should-i-take-first","title":{"rendered":"ISA or pension \u2013 which should I take first?"},"content":{"rendered":"\n

You may have heard that it\u2019s more tax efficient to draw money from Individual Savings Accounts (ISAs) before pensions in retirement<\/a>, and that personal pensions are something taken at a specific retirement age, such as an employer\u2019s \u2018retirement date\u2019 or when the state pension kicks in.<\/p>\n\n\n\n

While this strategy may work for some people, many of those retiring before the state pension age could end up with a bigger tax bill by only withdrawing income from ISAs. This may be beneficial under current rules as far as inheritance tax<\/a> (IHT) on early death goes, but these benefits will be impacted by the proposed changes to IHT on pensions from April 2027. By withdrawing income solely from ISAs, retirees also run the risk of not utilising multiple years of their tax-free personal allowance.<\/p>\n\n\n\n

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\"A<\/a><\/div>

A guide to income in retirement<\/h3>
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Find out your retirement income options and the steps you may need to take in our comprehensive guide.<\/p>\n\n\n\n

Download guide<\/a><\/p>\n<\/div><\/div><\/div><\/div><\/div>\n<\/div><\/div><\/div><\/section>\n\n\n\n

Our case study shows that someone ceasing work at age 60 could potentially save tens of thousands of pounds in tax by drawing some of their income from pensions as soon as they retire, but in a controlled way. Read on to find out why.<\/p>\n\n\n\n

How ISAs and pensions are taxed<\/h2>\n\n\n\n

The reason why it\u2019s often considered better to deplete ISAs before pensions in retirement is due to the way they\u2019re taxed.<\/p>\n\n\n\n

Although ISAs don\u2019t provide tax relief on contributions, withdrawals are completely tax free*. Personal pension contributions benefit from income tax relief<\/a>, but when you come to draw an income from the pension, usually only 25% can be taken tax free and the rest is taxed at your marginal rate of income tax.<\/p>\n\n\n\n

Under the current rules, another key difference between ISAs and pensions is the way they\u2019re treated for IHT purposes upon death. The value of your ISAs will be included in your estate for IHT purposes, whereas pensions currently usually sit outside of your estate. However, the chancellor announced in the 2024 Autumn Budget that unused pension funds and death benefits will likely be included within the estate from 2027.<\/p>\n\n\n\n

The theory is that by drawing money from ISAs first, you\u2019ll benefit from more tax-efficient retirement income and, currently, pass on a bigger pot of money to your loved ones. The changing rules around IHT and pensions could potentially have an impact your retirement and succession plans, so you may wish to speak to a financial or tax adviser.<\/p>\n\n\n\n

The role of the personal allowance<\/h2>\n\n\n\n

In reality, things are not quite so clear-cut. The approach that\u2019s right for you will depend on your individual circumstances and what you want to achieve with your money.<\/p>\n\n\n\n

Drawing money from ISAs first could also make sense if you\u2019re already receiving your state pension. The full state pension is just under \u00a312,000 a year for the current tax year. This pretty much uses up the \u00a312,570 tax-free personal allowance. If you made personal pension withdrawals on top of this, you could pay tax on the lion\u2019s share of your private pension income. You may also wish to leave your pension untouched if you think you\u2019ll want to contribute to it again in the future. Once you start drawing taxable income from a defined contribution pension, the maximum amount you can contribute each year and still get tax relief falls to \u00a310,000.<\/p>\n\n\n\n

On the other hand, if you retire earlier than the state pension age, taking some pension income as soon as you retire could prove tax efficient. The \u00a312,570 personal allowance can\u2019t be carried forward from one tax year to the next, so if you were to draw all your income from ISAs, your personal allowance would effectively be wasted. Over time, failing to use your personal allowance could result in a bigger-than-expected tax bill.<\/p>\n\n\n\n

Let\u2019s imagine you cease work at age 60 and decide to draw all your income from ISAs until the state pension kicks in at age 67. You won\u2019t pay any income tax during those seven years because ISA withdrawals are tax free. However, depleting your ISAs means the proportion of tax-free income you can draw in later years could be considerably smaller than if you\u2019d accessed your pension earlier. The case study below illustrates the potential tax savings that could be made by taking some pension income from age 60.<\/p>\n\n\n\n

Case study<\/h2>\n\n\n\n

Please note that these calculations do not take into account investment growth, charges or inflation. We also assume that the income tax personal allowance and tax rates stay the same for the entire period.<\/em><\/p>\n\n\n\n

Andrea retires at age 60 with \u00a3245,000 in an ISA and \u00a3950,000 in a personal pension, of which 25% of the value is available as a tax-free lump sum (up to the standard allowance of \u00a3268,275). This tax-free amount can be drawn:<\/p>\n\n\n\n