How to use your ISA as you approach retirement: a tax efficiency guide

Reviewed by Gary Horn, Chartered Financial Planner, Netwealth | [October 2026]

If you're 5 to 10 years from retirement with meaningful ISA savings, the question isn't just how much you have; it’s how to use your ISA for retirement in the most tax-efficient way alongside your pension.

ISAs are 100% tax free on withdrawal and don't count toward your taxable income. ISAs can play a significant role in generating tax-efficient retirement income because all capital growth and dividend income within an ISA is free from income tax. The key is knowing when to draw from your ISA, when to draw from your pension, and how to sequence those withdrawals intelligently.

Key takeaways

ISA withdrawals are 100% tax free and don't count as taxable income, unlike money withdrawn from a pension.
Your £20,000 annual ISA allowance can't be carried forward, so maximising it before retirement is essential.
Blending ISA and pension withdrawals can keep your total taxable income within the basic rate band.
From April 2027, most unused pension funds will form part of your estate for inheritance tax, potentially changing how you should sequence drawdown.

Getting the sequencing right across pension, ISA, and state pension income is where the biggest tax savings in retirement tend to happen. The April 2027 inheritance tax changes add a further layer of complexity that most people approaching retirement haven't yet planned for.

At Netwealth, our financial planners model year-by-year withdrawal strategies for clients in this position, mapping how pension, ISA, and state pension income interact to find the most tax-efficient path for their specific circumstances. Speak to our team to discuss your own sequencing strategy.

How to invest your ISA for retirement in later life

The best ISA for retirement in later life isn't always the same one that worked during your accumulation years. A stocks and shares ISA lets you hold your own investments across shares, bonds, and funds, with all investment returns sheltered from income tax and capital gains tax.

As retirement approaches, many investors gradually reduce equity exposure and increase lower-volatility assets, though the right balance depends on your income needs, other assets, and how long your retirement horizon is likely to be. A significant market fall just before you retire can permanently damage your retirement savings if you're forced to sell at depressed prices. A practical blend for many people is a cash buffer for near-term income needs, with continued equity exposure for long-term returns.

This is sometimes called sequence of returns risk, and it's one of the most common planning gaps we see in clients who come to us five years from retirement with a pension heavily weighted towards equities and no cash buffer.

When to consider moving cash ISA savings into investments

A cash ISA held elsewhere earns interest tax free and, unlike a pension, can be accessed at any time. But once you've used your personal savings allowance, interest on cash savings outside an ISA becomes taxable.

Tax band	Personal savings allowance
Basic rate taxpayer	£1,000 per year
Higher rate taxpayer	£500 per year
Additional rate taxpayer	£0

For those five to ten years from retirement, the question worth asking is whether that cash ISA still reflects where you actually are in terms of risk tolerance and time horizon, or whether some of it now belongs in a stocks and shares ISA instead.

As our CEO Charlotte Ransom has put it, the goal isn't to move people out of cash ISAs. It's to help them understand when it might make sense to shift some of those savings into investments for the longer term.

The ISA annual allowance and why it still matters

The annual ISA allowance is £20,000 for the 2026/27 tax year. Unlike pension contributions, ISA allowances can't be carried forward, and it's often advised to use your allowance early in the tax year rather than leaving it to the last minute. If you don't use it before 5 April, that year's tax benefits are gone permanently.

For anyone approaching retirement with money in taxable savings accounts or general investment accounts, maximising your ISA builds a retirement income pool on which you won’t pay income tax on withdrawls. Useful sources include cash earning taxable interest, investments subject to capital gains tax, and tax-free pension cash reinvested after drawdown begins.

ISA vs pension drawdown: tax treatment for a basic rate taxpayer

Pension income is taxable at your marginal rate. ISA withdrawals sit entirely outside this calculation and do not normally need to be declared on your tax return. The key income tax thresholds for 2026/27 are:

Personal allowance: up to £12,570 at 0%
Basic rate: £12,571 to £50,270 at 20%
Higher rate: £50,271 to £125,140 at 40%

The full new state pension is £241.30 per week, equalling £12,547.60 a year, which consumes almost all of the personal allowance. This means that should you receive the full State Pension, any additional income taken from your pension would be subject to income tax.

Take a straightforward example: your state pension is £12,548 and you draw £20,000 from your pension pot.

Your total taxable income reaches £32,548, producing a tax bill of around £3,996. Draw the same £20,000 from your ISA instead and the bill is zero. That's a £3,996 difference from one sequencing decision.

How pension income affects a higher rate taxpayer

For an individual subject to the main UK income tax rates, taxable pension income falling within the higher-rate band is taxed at 40%. If an entire £10,000 pension withdrawal would otherwise fall within that band, using an ISA withdrawal instead could avoid £4,000 of income tax in that year.

One possible approach is to use ISA withdrawals alongside pension income to manage exposure to higher tax bands, where this is appropriate for your wider financial and estate-planning objectives.

Sequencing ISA and pension to manage your tax bill

Which pot to draw down first depends entirely on your circumstances. Three common approaches:

Drawing ISA first suits those whose pension pot is large enough for long-term needs and who want to reduce their tax bill now
Drawing pension first suits those who want to preserve ISA wealth to pass on to beneficiaries, particularly after April 2027
Drawing both together suits those managing their taxable income band precisely each year

In practice, many of our clients approaching retirement focus on the size of their pension pot without considering how the sequence of withdrawals affects their lifetime tax bill. Getting the order right can make a meaningful difference, though exactly how much depends on your individual circumstances.

Pension inheritance tax changes and your ISA strategy

Under Finance Act 2026, from 6 April 2027 most unused pension funds and death benefits will be included in the value of a person's estate for inheritance tax purposes. Until then, pensions sit outside the estate. On death before age 75, beneficiaries can in most cases draw from an inherited pension free of income tax; after 75, withdrawals are taxed at the beneficiary's marginal rate.

Scenario	Before April 2027	From April 2027
Unused pension on death	Outside estate; no IHT	Inside estate; IHT potentially due
Death before 75	No income tax in most cases	value Usually no beneficiary income tax, subject to conditions; IHT may apply to the pension value
Death at or after 75	Marginal rate income tax; no IHT	Beneficiary income tax at the applicable marginal rate; IHT may also apply
ISA on death	Part of estate; IHT potentially due	No change

Until 6 April 2027, pension pots sit outside your estate for inheritance tax. Under Finance Act 2026, that changes. A Lifetime ISA already forms part of your estate and this remains unchanged.

Gifting alongside ISA and pension planning

The annual gifting exemption lets you give away up to £3,000 per year free of IHT, and gifts made more than 7 years before death become fully exempt under the seven-year rule. Regular gifting, planned alongside ISA and pension withdrawals, may reduce your estate's inheritance tax exposure over time, provided the relevant conditions and exemptions are met.

Using ISA and pension together to manage retirement income

Here's how a typical retirement income picture stacks up:

State pension: £12,547.60 per year (2026/27), taxable, uses most of the £12,570 personal allowance
Pension drawdown: taxable at marginal rate above £12,570
ISA withdrawals: 100% tax free, don't count toward total income
Interest: £1,000 savings allowance for basic rate taxpayers; £500 for higher rate taxpayers

For those with a workplace pension, employer contributions add free money to the pension pot. Your annual ISA allowance builds the tax-free retirement income layer on top.

Plan your retirement income with Netwealth

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Most people approaching retirement have the building blocks in place: a pension, an ISA, a state pension entitlement. What's often missing is a clear plan for drawing from them in the right order. That sequencing is where the most meaningful tax savings tend to be found. Netwealth's online planning tools let you model your own withdrawal scenarios before speaking to anyone.

For a personalised strategy built around your specific income, tax position, and estate planning goals, speak to our financial planners for a free initial consultation.

Please note: the value of your investments can go down as well as up. Netwealth offers advice restricted to our services and does not provide independent advice across the market. This article doesn't constitute financial advice and shouldn't be interpreted as a personal recommendation.Tax rules subject to change.

Frequently Asked Questions

Is an ISA better than a pension for retirement saving?

For most people, it's not a choice between the two. Pensions offer tax relief on contributions, making them more efficient for accumulating retirement savings, while ISAs offer 100% tax-free withdrawals, making them more efficient for retirement income. Using both intelligently is usually the best approach.

What is the annual ISA allowance for 2026/27?

The £20,000 ISA allowance for 2026/27 can be split across a cash ISA, stocks and shares ISA, and Lifetime ISA (up to £4,000 within the £20,000 limit). Unused allowance can't be carried forward, so it's worth topping up early in the tax year.

Can I use my ISA and pension at the same time in retirement?

Yes. Many retirees use phased pension drawdown to stay within the basic rate band and top up retirement income with tax-free ISA withdrawals, which don't count towards their taxable income. This approach can significantly reduce lifetime income tax, depending on the individual's circumstances and future tax rates.

How does the April 2027 inheritance tax change affect my ISA?

From 6 April 2027, most unused pension funds form part of your estate for inheritance tax, removing the previous IHT advantage of leaving your pension pot intact. For those wanting to pass on retirement savings, drawing pensions earlier and preserving ISA wealth may become more appropriate in some circumstances. However, the right approach will depend on the individual's tax position, objectives and beneficiaries.

When can I access my pension savings?

The normal minimum pension age is currently 55 and rises to 57 from 6 April 2028 under the Finance Act 2022. A cash Lifetime ISA can only be accessed penalty-free from age 60, on terminal illness, or for a first home purchase.

How does Netwealth help clients build retirement income?

Our financial planners build personalised retirement income strategies integrating ISA drawdown, pension sequencing, and estate planning, helping clients model withdrawal scenarios year by year to minimise lifetime tax.

Can Netwealth manage my ISA in later life?

Yes. Netwealth manages ISAs alongside pensions and other investments within a single coordinated strategy. Speak to our team to find out how. With portfolios selected to reflect the client’s agreed objectives and attitude towards risk.

What is a Lifetime ISA, and does Netwealth offer one?

A Lifetime ISA lets you save up to £4,000 a year toward a first home or retirement, with a 25% government bonus worth up to £1,000 annually. It can only be opened before 40, and it's being phased out from around April 2028 in favour of a new First-Time Buyer ISA, though existing holders can keep contributing under current rules until then.

Netwealth doesn't offer one: our personal pension (SIPP) and stocks and shares ISA are the more relevant options for clients approaching retirement.