ISA vs SIPP in Retirement
How to Draw Down Your Wealth Tax-Efficiently
Most of the ISA vs SIPP debate focuses on the accumulation phase: which should you put money into while you're working? That's the wrong question for retirees. If you have both an ISA and a pension pot, the more important question is: which do you draw from first, and in what order?Getting this right can save thousands in income tax.
The Fundamental Difference in Retirement
The tax treatment couldn't be more different once you start withdrawing:
| Feature | ISA | SIPP / Pension |
|---|---|---|
| Withdrawals taxed? | No — 100% tax-free | 25% tax-free, rest at marginal rate |
| Access age | Any age | 55 (rising to 57 in 2028) |
| Annual contribution limit | £20,000 | £60,000 (or 100% earnings) |
| Inheritance tax (from 2027) | Outside estate | Inside estate from April 2027 |
| Growth taxed? | No | No (until withdrawal) |
The Case for Drawing Your SIPP First
Conventional wisdom used to say: spend ISA first, preserve the pension because it sits outside your estate. The IHT change from April 2027 weakens that argument considerably. With pensions now inside the estate, there's a strong case for drawing your pension down during retirement rather than hoarding it as an inheritance vehicle.
Drawing your pension first also makes sense if your income will rise in future — for example, once state pension starts. If you retire at 60, you have up to 7 years where state pension isn't yet in payment. Use those years to draw your SIPP at a lower marginal rate before the state pension fills up your personal allowance.
The Pre-State Pension Window
Example: retire at 60, state pension starts at 67. For 7 years, your personal allowance (£12,570) is completely free. Drawing ~£12,500/year from your SIPP is effectively tax-free income during this window.
Once state pension starts (£12,548/year in 2026/27), that window closes — nearly your entire personal allowance is consumed. Every £1 of SIPP income on top of state pension is now taxed at 20%.
The Case for Drawing Your ISA First
ISA withdrawals are always tax-free — so if you're already a higher-rate taxpayer in retirement, drawing from your ISA rather than your SIPP keeps your taxable income lower, potentially keeping you in the basic rate band.
This matters most if you have a large defined benefit pension, rental income, or are still earning. Drawing ISA doesn't increase your SIPP balance either, so any growth in the pension pot is deferred — though note this comes with IHT implications from 2027.
The 25% Tax-Free Pension Complicates Things
You can take up to 25% of your pension pot tax-free, capped at £268,275 under the lifetime lump sum allowance. Whether to take this as a single lump sum or spread it across withdrawals depends on your tax position, but spreading it is usually better — taking a large lump sum in one year can push you into a higher bracket unnecessarily.
A Simple Sequencing Framework
There's no one-size-fits-all answer, but this framework works for many retirees:
- Before state pension age: Draw mainly from SIPP up to personal allowance (£12,570). Top up from ISA if you need more. Use 25% tax-free entitlement across these years rather than in one go.
- Once state pension starts: State pension fills most of your personal allowance. Pension withdrawals on top are taxed. ISA withdrawals become relatively more attractive here — they don't push you into a higher bracket.
- Later retirement: If your pot is still substantial, consider drawing down pension faster to reduce the amount subject to IHT from 2027. ISA remains outside the estate indefinitely.
Key Rule of Thumb
In years where your taxable income is well below the basic rate threshold (£50,270), draw more from your pension — it's coming out at 20% or less. In years where your taxable income is close to or above the threshold, draw from your ISA — it's completely free.
One More Thing: Cash ISA Limits Are Changing
From April 2027, the annual Cash ISA allowance will be cut to £12,000 for under-65s(the full £20,000 remains available in Stocks and Shares ISAs). If you're over 65, the £20,000 limit is unchanged. This doesn't affect existing ISA balances — just new contributions.