This guide gives you a clear, logical order for drawing from pensions and other pots so you keep more of The 10-step drawdown plan.

1) Start with your tax-free ranges on cash interest

Use your Personal Allowance (£12,570), Starting Rate for Savings (up to £5,000 if other income is low), and the Personal Savings Allowance (£1,000 basic-rate / £500 higher-rate / £0 additional-rate) to collect cash interest with little or no tax. (GOV.UK)

Tip: Park “next-year spending” in easy access cash first so you’re not forced to sell investments at a bad time.

2) Mop up your small dividend allowance

You have a £500 dividend allowance this year. Above that, dividends are taxed at the dividend rates for your band—so keep high-yield shares/funds inside ISAs/pensions where possible. (GOV.UK)

3) Use your CGT annual exempt amount (AEA)

Realise gains in your taxable account up to the £3,000. From 30 Oct 2024, most non-property gains are taxed at 18% (basic) or 24% (higher/additional) above the AEA, so taking small gains each year can save you tax later. (PwC Tax Summaries)

4) Take pension tax-free cash strategically (PCLS)

You can normally take up to 25% of your pot tax-free, but there’s now a hard cap called the Lump Sum Allowance (LSA)—£268,275 for most people unless you’ve got protection. Consider drawing just enough PCLS each year to fund both partners’ ISAs, rather than emptying it all at once.

Important: HMRC’s anti-“recycling” rules penalise taking tax-free cash with a pre-planned intent to push it straight back into your (own) pension for extra relief. Be aware of the thresholds/conditions. (GOV.UK)

5) Max out ISAs—your forever tax-shelter

Move money into ISAs annually so future income/growth is tax-free (adult ISA allowance still £20,000 each for 2025/26). Great use of PCLS. (GOV.UK)

6) Fill the rest of your income need from the pension—carefully

After steps 1–5, draw taxable pension income (or UFPLS) to your target—but note:

• Taking only tax-free cash does not trigger the money purchase annual allowance.
• Taking taxable flexible income (drawdown income or UFPLS) does trigger the MPAA and caps future DC pension contributions to £10,000 p.a. (MaPS)

7) Use low-coupon UK gilts in taxable accounts

For individuals, capital gains on UK gilts are CGT-exempt, so buying lower-coupon gilts at a discount lets more of your return arrive as CGT-free price appreciation (coupons are still taxable as interest; watch the Accrued Income Scheme if you trade between coupon dates).

8) Coordinate as a couple

• Marriage Allowance: if one partner’s income is below the personal allowance, they can transfer £1,260 of allowance to the other (worth up to £252 off the tax bill). (GOV.UK)
• Spread assets: gifting investments between spouses is no-gain/no-loss for CGT so you can place income/gains with the lower-tax partner. Consider a formal Form 17 declaration for property held in unequal shares. (UK Property Accountants)

9) Keep taxable investing tax-aware

• Funds/ETFs (acc units): reinvested dividends/interest are still taxable in the year they arise, and add to your base cost for CGT. You don’t get to defer the tax just because the fund reinvests. (Financial Times)
• Investment bonds (onshore/offshore): can defer income using the 5% cumulative allowance (not tax-free; tax is crystallised later on “chargeable event” gains). Niche, but useful in some plans. (GOV.UK)

10) Sense-check against IHT and the 2027 rule change

Right now, DC pensions are usually outside your estate (and beneficiaries often pay no income tax if you die before 75). But from 6 April 2027 most unused pension funds and death benefits will fall within the estate for IHT. This will change the traditional “spend ISA first, keep pension for heirs” rule of thumb—review plans ahead of 2027. (MaPS)

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How to check your tax code (and avoid “emergency tax” on first withdrawals)

• Check your code: Log in to your HMRC Personal Tax Account and make sure each pension payer is coded correctly. If it’s wrong, update online.
• First flexible withdrawal: Providers often apply a ‘Month 1’ emergency code and over-deduct tax. If that happens, reclaim using the correct HMRC form (P55/P50Z/P53Z) rather than waiting for year-end.

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Smart tactics to layer on top

• Bed & ISA every April: Move taxable holdings into ISAs up to the allowance to stop future tax drag (watch anti-recycling if funding with your own PCLS). (GOV.UK)
• Avoid the 60% effective rate (£100k–£125,140): if part-time earnings nudge you here, manage pension withdrawals to stay below the taper zone—or consider gift-aid/pension contributions (subject to MPAA/earnings limits).
• State Pension deferral: delaying increases your State Pension by ~5.8% for each full year deferred (new State Pension rules). It’s taxable when received, so fit it into your plan. (GOV.UK)
• Sequence risk: keep 2–3 years of spending in cash/short gilts so you can pause equity sales after market falls.

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Putting it all together: an annual checklist

1. Budget your net income target.
2. Cash first: use PA + SRS + PSA on interest. (GOV.UK)
3. Dividends: take up to £500 tax-free. (GOV.UK)
4. Take gains up to £3,000 AEA. (PwC Tax Summaries)
5. Draw some PCLS (mind the £268,275 LSA cap) to fund both partners’ ISAs (£20k each). (GOV.UK)
6. Top up from pension to your income target (be MPAA-aware). (MaPS)
7. Direct taxable investing toward low-coupon gilts, broad equity funds (acc units taxed annually), and CGT-aware trading.
8. Couples: consider Marriage Allowance and asset rebalancing. (GOV.UK)
9. Check tax codes and reclaim any emergency tax promptly.
10. Review IHT posture annually—especially ahead of the 2027 change on pension death benefits. (GOV.UK)

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Final thought

The winning formula in retirement is order + wrappers + allowances.

Build a simple strategy you repeat every April, keep records, and review your plan after each Budget—especially with the 2027 IHT change on pensions coming into view.