What’s the best order to use my savings, ISAs, and pension in retirement?

Before deciding which savings or investments to draw from, it’s important to work out how much you might need to achieve your ideal retirement lifestyle.

Think about the retirement you want. What does that look like? What would you like to spend your days doing? Where will you be and who will you be with?

Next, consider how much you’ll need to fund that lifestyle. This includes the essential costs, such as household bills and insurance, as well as non-essential costs, such as money spent on holidays, eating out, and hobbies.

It’s also important to remember that your spending is unlikely to stay the same throughout your retirement.

You’ll probably spend more during the early years when you’re still fit and healthy. It’s an opportunity for more travel, new hobbies, or making the most of your free time. Later, your discretionary spending may fall. Eventually, your spending could rise again if you need additional support or care.

An IFA can use cashflow modelling to project how your income needs may change over time, and how an unexpected event could impact your retirement plans.

Once you know how much income you’ll need to maintain your ideal lifestyle throughout retirement, check your guaranteed income sources to see how much they’ll cover. Guaranteed income might include:

• Your State Pension entitlement
• A defined benefit (DB) pension
• An annuity

This gives you a starting point for working out how much additional income you’ll need from your savings and investments and what your likely tax position will be.

Having easily accessible cash savings can give you a buffer for unexpected costs and help cover spending you expect to make in the short term].

However, holding large amounts of money in cash for many years can mean missing out on potential investment growth, and inflation can reduce its purchasing power over time.

So, using surplus cash savings to fund your early retirement spending can be a good idea, particularly if you have more cash than you need for your emergency reserve and short-term expenses.

It’s important to remember that the interest you earn on cash outside an ISA can be taxable, whereas money held in an ISA is tax-free. This means you also need to consider where you’re holding your cash and what return you’re getting on it.

Your cash options could include:

• Easy-access savings accounts, which offer guaranteed interest and can be accessed at any time.
• Fixed-term savings accounts, which offer guaranteed interest, often at a higher rate than easy-access accounts but can only be accessed after a certain amount of time has elapsed.
• Premium Bonds, which aren’t technically cash accounts, are quick and easy to withdraw money from, and the value cannot dip. Instead of earning interest, your bonds are entered into monthly prize draws, with prizes ranging from £25 to £1 million.

Because cash is more vulnerable to losing its real value to inflation over time, you might want to keep just enough to cover your emergency needs and short-term spending. Investing money you don’t expect to need for at least five years can give it a better chance of growing over the longer term.

An IFA can help you determine how much of your wealth to keep in cash.

ISAs can be particularly useful in retirement because the money you withdraw doesn’t count towards your taxable income.

There are two main types of ISA:

• Cash ISAs: These can be either easy access or fixed-term accounts, and any interest you earn in them is tax-free.
• Stocks and Shares ISAs: These invest your money in the market, so the value can go down as well as up. Any returns you earn are tax-free.

In 2026/27, you can put up to £20,000 across all your ISAs. However, from April 2027, Cash ISAs will be limited to £12,000 for people under 65.

You can usually take up to 25% of your pension as a tax-free lump sum, up to the Lump Sum Allowance (LSA) of £268,275 (2026/27). Your remaining pension income above the LSA is generally liable for Income Tax.

However, pensions can also be particularly valuable to leave invested because they can continue to grow tax-efficiently while you don’t need the money.

This is why simply taking your pension as soon as you reach the normal minimum pension age (NMPA) of 55 (rising to 57 by 2028) is not necessarily the most tax-efficient approach.

Equally, it might not make sense to preserve your pension indefinitely if you have significant pension savings and need the money to fund your retirement.

An IFA can work with you to develop a balanced approach built around your life goals and circumstances. While this will vary between people, it will often involve taking pension income gradually across several tax years to help you manage how much tax you pay.

Rather than thinking about retirement income as a choice between cash, ISAs, and pensions, it can be more useful to think about how the different pots work together.

For example, imagine you receive the full State Pension of £12,548 (2026/27) a year and need £50,000 a year to cover your spending. You would need to find £37,452 from your savings and investments.

Depending on your savings, you could take:

• £22 from your cash savings to bring you to the Personal Allowance of £12,570
• £8,000 from your ISAs
• £29,430 from the tax-free portion of your pension

In this example, your £50,000 would be completely tax-free.

Under the current rules and allowances, this withdrawal rate could last over nine years, provided your pension and ISAs were substantial enough. During the tenth year, you would reach the LSA, and your pension income would become taxable, at which point you may need to review your withdrawal strategy.

With careful planning and help from an IFA, you can ensure that your blended income remains tax-efficient throughout your retirement

There’s no universally correct answer because each arrangement will depend on your current standing and future goals.

However, a simplified, step-by-step approach might be:

1. Use guaranteed income first, such as your State Pension, DB pension, or annuity income.
2. Keep a cash reserve for emergencies and short-term spending, but don’t oversave.
3. Use surplus cash if you have more cash than you need for your planned spending and emergency buffer.
4. Use ISA and pension withdrawals strategically to help build a tax-efficient income over time.
5. Keep some money invested so it has the potential to grow, while ensuring your overall portfolio remains suitable for your circumstances.