After the planned April 2027 pension-IHT change, the old habit of spending ISA money first and preserving the pension for heirs needs a fresh test. This scenario compares three educational drawdown orders: pension-first, ISA-first, and blended.
The couple are around 72, mortgage-free, and already retired. They have about £850,000 of pooled investable assets across DC pension, ISA, taxable investments, and cash. Their secure income floor is about £3,841/month before tax from two full new State Pensions plus DB/annuity income.
The calculator cannot see which pound is in a pension, ISA, GIA, or cash account. It pools the balance, then uses spending lines to approximate the tradeoffs: pension-first has more tax-friction proxy, ISA-first has larger liquid-asset gifts, and blended keeps more care and review capacity. Exact UK tax, IHT, pension death-benefit, and care-funding results need verification before acting.
The branches are close on monthly spending by design. This is a sequencing question, so the useful comparison is how each plan handles tax drag, liquidity, gifts, and late-life reserves.
Pension first draws down pension wealth sooner and carries £600/month of tax-friction proxy through age 84. Gifts are smaller, and the branch keeps a £150k care reserve. In the base run it finishes age 96 with about £1.08m of pooled capital.
ISA first keeps taxable pension withdrawals lower while using ISA and taxable assets for £900/month of gifts through age 84. It is the familiar order, but it no longer gets a free inheritance pass after the planned reform. The base run finishes with about £1.07m.
Blended uses a smaller £300/month tax/admin proxy, medium gifts, an advice review cycle, and a £175k care reserve. It finishes with about £1.06m and is designed to reduce regret if tax rules, markets, health, or family needs do not match the base case.
This branch challenges the assumption that DC pension money should stay untouched until other accounts are gone. After April 2027, an unused pension may sit closer to the rest of the estate for IHT purposes, so gradual pension use can be worth testing.
That does not make large withdrawals automatically sensible. Pension withdrawals can create Income Tax, reduce future shelter, and simply move wealth into another estate-exposed wrapper. Treat this as a band-management and resilience test, not a tax shortcut.
This branch spends from ISA and taxable assets before leaning harder on the pension. It may keep taxable income smoother and preserve pension optionality for a survivor or later care needs.
The tradeoff is that ISAs are normally inside the estate for IHT after death, and the planned pension-IHT change weakens the old inheritance reason for always preserving pensions. ISA-first can still be right, but it needs a reason beyond habit.
The blended path uses each account type for a job: pension for planned taxable income, ISA/cash for flexible liquidity, taxable assets for deliberate spending, and a visible reserve for care. It is less elegant than a single rule, but it is more robust for a public scenario.
This is often the branch to discuss first with an adviser because it exposes the real questions: how much secure income the survivor needs, how much care reserve feels non-negotiable, and how much inheritance planning can happen without reducing independence.
Pension-IHT reform: HMRC material says most unused pension funds and pension death benefits are expected to enter IHT scope from 6 April 2027. Final implementation, scheme process, and beneficiary timing need verification.
ISA treatment: ISAs remain tax-sheltered while held, but they normally form part of the estate for IHT after death.
IHT thresholds: the research file records the nil-rate band at £325k and residence nil-rate band at £175k, with transfer rules for spouses/civil partners. Eligibility and tapering are household-specific.
Pension withdrawals: the tax-friction lines are proxies. The model does not calculate personal allowances, tax-free lump sum availability, marginal tax bands, Scottish bands, or pension death-benefit Income Tax.
Care reserve: the late-life care entries are stress-test guardrails. They are not a care-fee means-test calculation.
Replace the pooled £850,000 with your pension, ISA, taxable investment, and cash split.
If your pension is much larger than your ISA, stress-test pension-first and blended before assuming ISA-first still fits.
If your ISA is the main liquidity reserve, test what happens when care costs arrive five years earlier.
Change secure income before changing gifts. A surviving partner with lower secure income may need more liquid reserve than the base case shows.
Keep every exact IHT, gift, pension death-benefit, and care-funding conclusion marked needs verification until checked against your household documents and current rules.