Retirement income is taxed by the wrapper it leaves, the allowance it lands in, and the name it arrives under. Five choices decide most of the bill. Each one below names the rule it uses and the number in force for 2026/27, so the reader can check every line.
Information and guidance only. Not personal advice. This guide explains published UK rules for the 2026/27 tax year; it is not a recommendation to draw from any wrapper in any order. Investment values can fall as well as rise. Verify decisions with a qualified FCA-authorised adviser before acting.
Everyone has £12,570 of income a year that is taxed at nothing, and it does not carry forward. In the years before the state pension starts, a household with no other income can size its pension withdrawals so the taxable part lands exactly on the allowance.
The number that does it: a pension withdrawal of £16,760, of which a quarter is tax-free cash and the remaining three quarters come to exactly £12,570. Tax on that withdrawal: nil. Once the state pension is being paid it uses most of the allowance on its own, which is why the years before it are the cheap ones.
Rule: income tax personal allowance, frozen until 2031A quarter of a pension can be taken tax-free, up to the lump sum allowance of £268,275. Taking it all in one go is allowed. Taking it in slices, a quarter of each withdrawal, is also allowed, and pairs each slice's tax-free part with the taxable part that fills the allowance in way one.
There is no single right answer between the two. Cash taken early stops growing inside the pension and sits inside the estate; cash left inside keeps growing but is subject to the April 2027 change in way five. It is a household decision, worth making on the household's own numbers.
Rule: pension commencement lump sum, 25%, capped by the lump sum allowanceAlmost every allowance in the UK tax system is personal. A couple does not share one set; each holds one. Two personal allowances, two dividend allowances of £500, two capital gains exemptions of £3,000, two ISA allowances of £20,000 a year.
A couple who can choose whose name each pound of income arrives in can use both sets in full. Our worked example draws £48,000 in a year across a retired couple at a total tax bill of nil, using nothing but allowances that reset every April.
Rules: personal allowance, dividend allowance, CGT annual exempt amount, ISA subscription limitThe same withdrawal costs a different amount depending on where it comes from. From an ISA: nothing, at any income. From a general investment account: only the gain is taxed, at the basic or higher capital gains rate, and nothing at all inside the £3,000 exempt amount. From a pension: a quarter tax-free, three quarters taxed as income at the household's marginal rate.
The old default of general account first, ISA next, pension last rested on one fact: an unspent pension passed to heirs outside the estate. Way five is why that reflex now needs checking.
Rules: ISA withdrawals, capital gains tax rates and exempt amount, pension income taxationFrom 6 April 2027 an unspent pension counts towards inheritance tax. Above the allowances, the rate is 40%: the nil-rate band of £325,000, plus £175,000 where the home passes to children or grandchildren, and both can transfer between spouses.
Three levers move that bill without changing a lifestyle. Draw the pension earlier and spend or gift it, since gifts fall outside the estate after 7 years. Leave 10% of the net estate to charity and the rate on the rest drops to 36%. And keep the home in the picture, because the extra allowance depends on who inherits it.
Rules: pensions in the estate from April 2027 (enacted), nil-rate band, residence nil-rate band, potentially exempt transfers, charity rate