Should I spend my pension first now?

For the last decade, a common rule of thumb was: spend your savings and ISAs first, and leave your pension until last, because pensions were usually outside your estate for inheritance tax. From 6 April 2027, most unused pensions count for inheritance tax, so that rule no longer fits as many people. But "spend the pension first" isn't automatically right either.

This page compares two orders of spending to show how the tax works. It is not a recommendation; the right order depends on your income, health, family and the money you may need later. Pension Wise offers free, impartial guidance to people aged 50 or over with a UK defined contribution pension, with some exceptions for younger people. A regulated financial adviser can give a personal recommendation.

What's changed, and what hasn't

Changed: for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will count towards your estate for inheritance tax. Savings and ISAs already count. Some pension benefits, including dependants' scheme pensions and death-in-service benefits, are excluded.

Not changed:

Pension withdrawals (apart from tax-free cash) are taxed as income; ISA withdrawals aren't.
Pensions grow free of income and capital gains tax; so do ISAs.
The income-tax treatment of an inherited pension depends on your age at death and the type of benefit; see below. Inheriting ISA capital does not itself create an income-tax charge.
Pension benefits left to a spouse or civil partner normally qualify for the inheritance-tax spouse exemption, as do other assets. Cross-border residence circumstances can restrict that exemption.

Inherited drawdown and lump sums have different rules

If you die before 75, withdrawals from a new beneficiary flexi-access drawdown fund are normally free of income tax. Where unused funds had not yet been put into drawdown, they must be designated to the beneficiary's drawdown fund within two years of the scheme administrator knowing, or reasonably being expected to know, about the death. The beneficiary does not have to withdraw the whole pot within those two years. These drawdown withdrawals are not tested against your lump sum and death benefit allowance.

Lump-sum death benefits have separate rules. Most lump sums following a death before 75 must be paid within the relevant two-year period to be tax-free, and relevant lump sums are tested against your remaining lump sum and death benefit allowance. Exceptions apply, including for some funds already crystallised before 6 April 2024.

If you die aged 75 or over, inherited drawdown and most lump-sum payments to an individual are taxable at the beneficiary's income-tax rates. Dependants' scheme pensions are normally taxable regardless of your age at death. These income-tax rules are separate from inheritance tax.

A worked comparison

Lee is 66, already receives the full new State Pension, has a £300,000 uncrystallised defined contribution pension and £150,000 in ISAs, and needs £25,000 a year of spending money on top of the State Pension. We use £12,548 for the State Pension, rounding the 2026/27 full rate of £241.30 a week over 52 weeks.

For the inheritance-tax comparison, assume Lee's home and other assets already exceed the available nil-rate bands. The pension and ISA balances therefore add to an estate already taxable at 40%. Assume no spouse or charity exemption, other reliefs or change in residence nil-rate band from tapering. This compares the additional estate tax associated with these balances; it does not allocate the tax bill between the pension and the other assets.

Order A: ISAs first. Lee spends £25,000 a year from ISAs for six years. No income tax. The pension stays invested.

Order B: pension first. To have the same £25,000 a year to spend after tax, Lee takes about £29,407 a year from the pension, with 25% of each withdrawal tax-free. Taxable private-pension income is about £22,055, plus the State Pension: about £34,603 in total. After the £12,570 Personal Allowance, income tax at 20% is about £4,407 a year. The ISAs stay invested.

After six years, when Lee is 72 (ignoring growth)	Order A: ISAs first	Order B: pension first
Pension left	£300,000	about £123,600
ISAs left	£0	£150,000
Income tax paid by Lee	£0	about £26,400
Additional estate inheritance tax represented by these balances, if Lee died then under the assumptions above	£120,000 (40% of £300,000)	about £109,400 (40% of £273,600)

The £120,000 in the table is the pension's effect on the total estate-tax bill, not necessarily the inheritance tax legally attributable to the pension. That attribution depends on the full estate calculation, including the available allowances. It cannot be used automatically to calculate beneficiaries' income tax.

In this simple example, order B leaves less in the estate because Lee has paid income tax along the way, so the inheritance tax is a little lower. A lower inheritance-tax bill alone does not mean the family keeps more overall.

A later death at 75 or over is a separate hypothetical case. Lee is only 72 at the end of this comparison. If Lee instead died at 75 or over, beneficiaries could face income tax on the remaining pension under either order. Their tax would depend on the balances then, the inheritance tax attributable to their pension benefits, who bears that tax, and their own income and withdrawal timing. Where the beneficiary bears the attributable inheritance tax, the corresponding amount is excluded from taxable pension income, with a claim potentially needed if income tax was already deducted. No beneficiary income-tax figure is included in this six-year table.

Illustrative, not advice. Uses England, Wales and Northern Ireland 2026/27 income-tax rates, a full Personal Allowance, no other taxable income and enough available tax-free lump sum allowance for 25% of each pension withdrawal to be tax-free. It holds these rates, allowances, the State Pension and spending constant for six years purely to compare the two orders; it is not a forecast. Ignores investment growth, charges and inflation. Scottish pension-income tax rates differ.

What the answer depends on

Your tax rate now versus your beneficiaries' later. Different tax rates can change the comparison, but a lower tax rate today does not establish which order is better. Tax-free cash, growth, inheritance tax, spending needs and beneficiaries' withdrawal timing also matter.
Your age at death and the benefit type. The before-75 rules above can make qualifying inherited drawdown free of income tax. Death at 75 or over normally makes withdrawals taxable; scheme pensions follow different rules.
Whether your estate is above the nil-rate bands at all. If it isn't, inheritance tax isn't the issue.
Your spouse or civil partner. The spouse exemption normally changes when inheritance tax may arise, subject to the residence qualification above.
Your own security. ISA and pension withdrawals have different tax consequences and access arrangements. Spending money you might need later just to reduce inheritance tax can backfire.

FAQ

Should I spend my pension before my ISA now? Not necessarily. From April 2027 most unused pensions join ISAs in the inheritance-tax calculation. Income tax, access to money, investment choices, charges and your future spending needs all matter. There is no universal withdrawal order.

Is it still worth leaving my pension to my children? Pensions can still pass value to children, subject to scheme rules and the provider's decisions. What they receive depends on inheritance tax, your age at death, the type of benefit and any income tax on withdrawals. The 2027 change does not by itself establish whether withdrawing or retaining money is better for you.

Do ISAs count for inheritance tax? Yes. ISA value is included in your estate for inheritance tax. Whether tax is due depends on the estate's allowances and exemptions, including the usual spouse exemption.

Will drawing more from my pension push me into a higher tax band? It can. Drawing a larger amount in one year can push income into a higher band; the tax depends on your total income that year.

Sources

General information, not a personal recommendation. Tax treatment and pension rights depend on the rules and individual circumstances.