The Order You Draw Different Pots Matters More Than You Think
Two retirees with identical £4m balance sheets, identical spending, and identical investment performance can produce more than a £500,000 difference in lifetime tax depending solely on the order they draw from pension, ISA, GIA, and bond. Drawdown sequencing is the most underweighted decision in retirement planning. The post-2027 IHT changes have made it more important still.
The conventional wisdom on retirement drawdown is to draw from the least tax-efficient wrapper first and leave the most tax-efficient wrapper untouched as long as possible. For most of the last fifteen years, that meant: draw from GIA first, ISA second, pension last. The pension was treated as the long-life asset because it grew tax-free, sat outside the IHT estate, and could pass to beneficiaries with favourable tax treatment.
That logic is changing. The proposed inclusion of unused defined contribution pensions in the inheritance tax net from April 2027 has materially altered the calculation. The pension is no longer the obvious "draw last" asset for clients with significant pension wealth and the order of drawdown across pension, ISA, GIA, and bond now needs to be worked out from first principles for each client.
This article sets out the principles that determine the right sequence, with worked numbers.
The four pots, the four tax treatments
Every retiree of any complexity has wealth split across four broad categories of wrapper, each with materially different tax treatment on withdrawal:
Pension - 25% tax-free lump sum (subject to the Lump Sum Allowance), remainder taxable as income at the policyholder’s marginal rate at the time of drawing. From April 2027, the residual pension on death is proposed to be subject to inheritance tax.
ISA - fully tax-free on withdrawal, no tax on income or capital gains while held, fully within the IHT estate on death.
GIA (general investment account) - capital gains tax on disposals (currently 24% above the £3,000 annual allowance for higher-rate taxpayers), dividend tax on income (currently 39.35% for additional-rate taxpayers above the £500 allowance), fully within the IHT estate.
Investment bond (onshore or offshore) - tax-deferred rollup inside the wrapper, taxable at chargeable events using the chargeable event regime, generally within the IHT estate unless held in trust.
The right order to draw from these depends on the client’s marginal tax position now, their expected marginal tax position later, the size of each pot, and the IHT picture across the lifetime. There is no universal answer.
The conventional sequence, and why it’s wrong for many clients now
Until recently, the conventional sequence for a typical retiree was:
GIA first (use CGT and dividend allowances each year while drawing capital). ISA second (preserves tax-free wrapper but produces tax-free income). Pension last (preserves the IHT-free wrapper for beneficiaries).
The logic was sound when pensions sat outside the estate. Drawing pension last meant the pension compounded tax-free, the residual passed to beneficiaries free of IHT, and the client’s lifetime tax was minimised.
The April 2027 IHT change unwinds the third leg of that argument. Once pensions sit inside the IHT net, the case for drawing pension last weakens. For some clients, drawing pension first now becomes more tax-efficient over the lifetime.
A worked example: the £4m client
Consider a 67-year-old retiring with £4m of investable wealth split as: £1.5m pension, £400k ISA, £1.6m GIA, £500k cash. Annual spending requirement: £100,000 net.
Old logic (draw GIA first, pension last):
The client draws £100,000 a year from the GIA, using CGT and dividend allowances to minimise tax on withdrawals. Pension and ISA both compound. After fifteen years, the GIA is largely depleted, the pension has grown to roughly £2.4m, and the ISA has grown to roughly £640k. On death at age 82, the pension passes to beneficiaries IHT-free, the ISA falls into the estate at 40%.
Pre-2027 lifetime tax outcome: roughly £180,000, almost entirely on GIA disposals across the period.
Post-April 2027 outcome (same sequence): the £2.4m pension on death now sits in the IHT estate. Combined with the ISA and other assets, the marginal IHT rate on the pension portion is 40%. Additional IHT on death: £960,000.
Total lifetime tax: roughly £1.14m.
New logic (draw pension first, partially):
The client draws the 25% tax-free lump sum from pension at retirement, uses it to fund the first three to four years of spending, then draws taxable pension income at basic-rate band each year while leaving GIA and ISA to compound. The pension is steadily reduced over the retirement period, by age 82 the pension residual is closer to £900k rather than £2.4m.
Lifetime tax outcome: roughly £200,000 across pension income (drawn at basic rate where possible), plus modest GIA disposals.
IHT on death: the smaller pension residual exposed to IHT plus the larger remaining GIA and ISA. Marginal IHT on the pension portion, roughly £360,000.
Total lifetime tax: roughly £560,000.
Difference: roughly £580,000 in favour of drawing pension first.
The numbers are illustrative and depend heavily on growth assumptions, tax band thresholds, and the precise sequence chosen. But the direction is clear. For clients with significant pension wealth, the post-2027 sequence inverts the historical logic.
Where the new logic doesn’t apply
The reframing isn’t universal. Three situations where drawing pension last still makes sense:
Where the client has small pension and large GIA. A client with £200k pension and £3m GIA has minimal IHT exposure on the pension portion regardless of how it is drawn. The CGT cost of running through the GIA early would outweigh the IHT saving on pension. Conventional sequence still wins.
Where the client expects to drop into a meaningfully lower tax band later. A 60-year-old still in the 45% additional-rate band who plans to retire fully at 65 should draw from non-pension wrappers first and leave pension drawdown for the lower-tax window. Marginal-rate timing dominates the IHT calculation in this scenario.
Where the client has high lifetime spending. A client whose retirement spending is high enough to deplete most or all of their wealth across the retirement period has limited residual estate at death. The IHT calculation matters less, the income tax on pension calculation dominates. Conventional sequence often still wins.
The role of partial annuitisation in the new logic
The case for partial annuitisation gets stronger under the new regime, not weaker.
Drawing pension capital and using it to purchase a guaranteed income stream removes the capital from the IHT exposed pension wrapper, replaces it with a stream of income payments, and locks in retirement income certainty. For a client in the £4m bracket, annuitising £750,000 of pension capital to produce a guaranteed £30,000 to £40,000 a year of inflation linked income removes that capital from the IHT calculation, smooths the drawdown profile, and reduces the longevity risk premium the client would otherwise carry.
The interaction between drawdown sequencing and partial annuitisation is meaningful and worth modelling explicitly. We covered annuity rates and the partial-annuitisation case in "Annuities Are Worth Looking At Again" the structural argument here is that partial annuitisation now sits alongside pension-first drawdown as part of the same response to the post-2027 IHT regime.
ISA and GIA: the supporting cast
Once the pension question is settled, the GIA vs ISA sequence is more straightforward, but still warrants attention.
ISA before GIA if the marginal CGT on GIA disposals is higher than the marginal income tax on ISA withdrawals, which it almost never is, because ISA withdrawals are tax-free. So GIA usually comes first.
ISA last for IHT planning is a reasonable rule of thumb, but the planning gain is modest. ISA capital in the estate is taxed at 40% IHT, but so is GIA capital. The CGT vs income-tax efficiency of the GIA across the drawing period is usually a larger lever than the order of IHT exposure question.
Cash and fixed-term deposits are usually drawn opportunistically, used to absorb market drawdowns when liquid drawing from invested wrappers is unattractive. Holding two to three years of essential spending in cash is a useful behavioural and tax buffer rather than a primary income source.
What this means in practice
If you are reading this because you are within five years of retirement, or already retired, with pension wealth above £500,000, three structural questions are worth working through:
What does your IHT exposure on pension look like under the post-April 2027 regime? The answer is materially different from the pre-2027 calculation for most clients with significant pension wealth. If your existing drawdown plan was designed before the April 2027 announcement, it likely needs to be rebuilt.
What is your marginal income tax band now and across the next ten years? The optimal sequence depends heavily on whether you expect to be in the basic, higher, or additional-rate band at the point of drawing. Rules of thumb produce wrong answers here; modelling produces right ones.
What proportion of your pension is best converted to a guaranteed income stream? Partial annuitisation interacts with drawdown sequencing rather than competing with it. The right structure for many clients now involves both.
The cleanest way to answer all three is in a cashflow model that runs the actual numbers across thirty years and stress-tests the conclusions against rate, market, and policy variability. Rules of thumb produced the conventional answer, rules of thumb won’t produce the new one.