What is the most tax-efficient order to draw pension and savings income in the UK?

Full answer

The optimal order to draw retirement income depends on individual circumstances, but the following framework applies to most UK retirees in 2026/27: **Step 1 — ISA drawdown (tax-free)** ISA withdrawals carry no income tax or CGT. Drawing from your ISA first preserves pension funds to grow tax-deferred and can keep taxable income low, preserving the Personal Allowance. **Step 2 — Fill the Personal Allowance with taxable income** The Personal Allowance is £12,570 for 2026/27. Pension drawdown (UFPLS or flexi-access drawdown) up to the PA is effectively tax-free. The State Pension (£12,547.60 if full) already uses most of the PA for many retirees — check whether you still have PA capacity. **Step 3 — Starting rate for savings (£5,000)** If non-savings taxable income is below £17,570, some or all of your savings interest may be tax-free under the starting rate for savings (£5,000 band). Interest income within this band is taxed at 0%. **Step 4 — Take the Pension Commencement Lump Sum (PCLS)** The tax-free cash entitlement is 25% of the pension pot (capped at £268,275 for the Lump Sum Allowance under 2024 rules). Consider phasing the PCLS across multiple years if it would push you into a higher band. **Step 5 — Pension drawdown in basic-rate band** Draw further taxable pension income at 20% basic rate (income £12,570–£50,270). Avoid crossing the 40% threshold unless ISA or other tax-free sources are exhausted. **Money Purchase Annual Allowance warning** Flexibly accessing pension income (drawdown beyond PCLS) triggers the MPAA, reducing future pension contributions to £10,000/year. Time this carefully if you still earn income and want to contribute.

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