For most of the past decade, conventional retirement planning has said one thing about the order in which to draw your assets: spend ISAs and general investments first, leave the pension untouched. From April 2027, the calculus changes.
The conventional wisdom, and why it worked
Under current rules, the pension is the most tax-efficient asset to leave behind. It sits outside the estate for inheritance tax, and beneficiaries inherit it on relatively favourable terms. By drawing other assets first, ISAs, general investment accounts, cash, a retiree could shrink the taxable estate while leaving the pension as a tax-efficient inheritance for the next generation.
For estates above the inheritance tax thresholds, this was often the most efficient ordering by some margin.
What changes from April 2027
Once pensions fall within the estate for inheritance tax, leaving the pension untouched is no longer automatically the most efficient strategy. A large pension pot at death is now potentially taxed twice. Inheritance tax at 40 per cent on the pension within the estate, and (where the member dies after age 75) income tax at the beneficiary's marginal rate on withdrawals.
The income tax deduction softens this, but does not always remove it. For some families, the combined effective tax rate on inherited pension wealth can be high.
What the alternative might look like
For some clients, drawing more pension during their lifetime, and using it to fund living costs, gifts, or spending that would otherwise come from other assets, may be more efficient overall. For others, the right approach may be to draw evenly from multiple sources, or to crystallise the pension differently. For others again, the existing strategy continues to be the best one.
The right answer depends on several things acting together.
- The size of the pension relative to the rest of the estate
- The age, health and life expectancy of the pension holder
- Family structure, gifting intentions and charitable plans
- Current and expected future income tax positions, including the bands the beneficiary is likely to be in
- Any business interests, qualifying business assets, and the use of available reliefs
Why modelling matters
This is an area where the answer is rarely intuitive. The interaction of income tax, inheritance tax, the income tax deduction, the time value of money and life expectancy means that a small change in drawdown strategy can compound into a significant difference in family wealth over twenty years.
Cash flow modelling done properly is the tool that exposes which approach actually works best for a given family. We use it most often with clients in the five-to-fifteen years before and after retirement, where decisions made now have the longest tail.
Sources: HMRC technical note on inheritance tax on pensions; Finance Act 2026; HMRC analysis of estate impacts 2027-28.