# Which Should You Spend First in Retirement? (Most people get this wrong)

## Метаданные

- **Канал:** James Shack
- **YouTube:** https://www.youtube.com/watch?v=d4MDvcEcHXI
- **Дата:** 21.04.2026
- **Длительность:** 20:14
- **Просмотры:** 92,065
- **Источник:** https://ekstraktznaniy.ru/video/53026

## Описание

Looking for help planning your retirement? 
I am a Chartered Wealth Manager and Partner in a financial planning practice based in the UK. Find out how we can help here: https://go.novawm.com/yt/d4MDvcEcHXI

Is my expenditure sustainable? 
https://youtu.be/ViBvcV3EL2s?si=pnVQnMKhP_Wref-Y

Normal Expenditure Out of Income Exemption Explained
https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/exemptions-and-relief/normal-expenditure-out-of-income

Risk Warnings and Disclaimers
Capital at risk. Past performance is used as a guide only. It is no guarantee of future returns. Different funds and asset classes carry varying levels of risk depending on the geographical region and industry sector. You should make yourself aware of these specific risks prior to investing. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. We do not provide tax advice. Any examples used in the video are for illustrative purpose

## Транскрипт

### The Problem []

Since November 2024, I have been flooded with messages from people who thought they understood how pensions and ISAs work and how they should all fit together in retirement, but are now not sure about anything. I'm a financial planner. I live and breathe this stuff. It is literally my job. So, in October 2024, I made a video on this exact topic, which got hundreds of thousands of views. The only problem is that a month later, Rachel Reeves comes along and announces changes to pensions and inheritance tax that completely rewrote the rules that retirement planning strategies have been built on for decades. And since then, I've seen a wave of confusing, conflicting advice online suggesting that you should now draw down your pension as fast as possible. Take tax-free cash. Maybe shift everything to ISAs that frankly could be damaging and could be costing people hundreds of thousands of pounds. Yes, the rules have changed, but for a lot of people, the optimum drawdown strategy hasn't changed as much as you think. The problem is knowing whether you're one of these people and if you're not, what you should actually be doing differently. Unless you're lucky enough to have a defined benefit pension that is going to provide all of the income that you need in retirement, you're going to need to create your own income by drawing down from the savings and investments that you have built up over your lifetime. This could be defined contribution pensions, ISAs, perhaps other investments. The question then is which bucket or which combination of buckets should you draw from first? So, in this video, I want to give you a simple five-step framework that you can apply to your own situation to work this out given the new rules and to help you cut through all of this noise. Let me

### Step 1 - Expect Income Cashflow Forecast [1:37]

introduce you to Roy. Roy is 60 years old and he is just about to retire and he has two key goals. The first is to create a sustainable, tax-efficient income for himself in retirement. That's goal number one. But once that's achieved, he wants to leave as much money to his children as he can. So, the first step of this process is to lay out any guaranteed income sources that you think you're going to have coming in. So, for Roy, he has a small DB pension, which will start paying out at 65 and be paying about £5,000 per year. Then, he's going to get a full state pension, which is going to come online at 67. Now, each of these is set to increase more or less in line with inflation, but when you're doing these types of projections, it's much easier to think about this stuff in today's terms, hence why they will appear here as a straight line.

### Step 2 - Estimate Retirement Spend [2:26]

Step two is to estimate how much you think it's going to cost to sustain the lifestyle you're looking for in retirement, and how that is likely to vary over time. For Roy, though, let's just keep this simple and say he wants to spend £40,000 per year throughout retirement, but increasing this in line with inflation. So, at the start of retirement, Roy needs to find an extra £40,000 per year. At 65, that's going to drop to £35,000, and then about £23,500 when his state pension comes online. Now, if you are If you're looking at these numbers and you're thinking, is this video really relevant for me? Don't worry. You can apply this same methodology that I'm going to show you, whether you are looking to spend half as much as this or many times more. So, to create this income, there are three different buckets that Roy can draw from. He's got a stocks and shares ISA valued at £150,000, and a defined contribution pension valued at £500,000, but there's two parts to that. There's 25% of it, which can be drawn down tax-free, either as a lump sum or bit by bit over time, whilst the other 75% is taxable at marginal rates of income tax. So, Roy needs to find £40,000 in this first year of retirement. The question is, which bucket should he draw from? But actually, before we get into that, there's another really important step

### Step 3 - Assess Sustainability [3:43]

which is to first assess whether Roy's desired spending is even likely to be sustainable given the assets that he has, with step two and three actually being done in conjunction and feeding into each other. I'm not going to go into detail how to do this here because I've done a bunch of other videos that explain exactly how to do this, and I'll leave links to those down in the description of the video, but let's say for the sake of this example, Roy's done this and he's confident that this expenditure is likely to be sustainable.

### First Lens - Retirement Income Optimisation [4:11]

sustainable. Step four then is the big one where we decide which bucket to draw from first. To help highlight the best option, there are three different lenses that we need to apply and them in a very specific order. The first is assessing this through the lens of achieving his primary goal, so creating an income in retirement in the most tax efficient way, forgetting about inheritance tax for now. So, based on this, which bucket do you think Roy should draw from first? If he draws from either of these tax-free buckets, he'll have no income tax to pay this year, which might sound like a good thing, but let's say he keeps doing that. Fast forwards six or seven years, it's likely that he would then have depleted all of his tax-free buckets. At that point, he'll have then his state pension and DB pension coming in already, which are likely going to push him into the basic rate tax band, which means that he's then going to need to pay at least 20% income tax on everything that he then draws from the taxable part of his pension. Whereas, if instead during those first few years of retirement, he decided to make taxable pension withdrawals up to the personal allowance, there would be no tax to pay. If he does this between now and his state pension coming online, he might be able to withdraw perhaps almost 80,000 pounds from the taxable part of his pension without paying any tax. Not only that, but this would then help him to preserve his tax-free buckets, giving them further potential to grow, and then to be used tactically to help him avoid paying higher taxes later in life. So, at a minimum, this tactic would save him about £20,000 in tax, assuming that he'd otherwise have to pay basic rate tax on those withdrawals. But, it could end up being way more than that. In this simple projection, we've assumed that income tax bands will increase in line with inflation, hence why they look flat here. But, is that a realistic assumption? The solid blue line here shows how the higher rate tax threshold has tracked against inflation since 1990. There's been periods where it's risen faster than inflation, lagged, but overall, it's pretty much kept pace with inflation. Whereas, in solid red here, we can see the personal allowance, which has actually increased much faster than inflation, largely due to big increases in the 2010s. However, since 2022, income tax bands have been frozen, and last year, the government actually extended that freeze until 2031. And you can see the effect that this is starting to have as inflation has picked up over the last few years. So, the risk here is that if Roy decides to deplete all of his tax-free buckets up front, and inflation continues at this pace, or tax bands get frozen again, his taxable pension withdrawals could end up pushing him into the higher rate tax band in the future. But, if by employing this personal allowance strategy, he can preserve some of his tax-free buckets, and then draw on those in the future to help keep him out of the higher rate tax band, this strategy could save him up to £50,000 in tax. And that's £50,000 that then gets to remain invested, and has the potential to keep growing, which, you never know, could leave him or his beneficiaries potentially hundreds of thousands of pounds better off in the future. So, this is the thing. Drawing from an ISA, or taking tax-free cash, might seem like it's tax-free today, but it's not really tax-free if that action means that you're then end going to end up paying a whole load more tax further down the line. The big game when it comes to retirement planning, and trying to be tax-efficient is to pay as little tax as possible when drawing money from the taxable part of your pension. Not just today, but over your lifetime. And your tax-free buckets exist to help you do that. Which means that the question that you really need to be asking is if I draw from the taxable part of my pension now, am I likely to pay more or less tax than that in the future? The answer to that question will sit somewhere on a spectrum. If say you are 99% confident that you will pay more tax in the future, then taking advantage of every opportunity to pay less tax now is going to look really attractive. If you're 99% confident that there will be opportunities to pay less tax in the future, paying that tax now might not be a good idea. But if you're confident that you'll pay the same amount of tax now as in the future, this is where you need to then go on and apply the second and third lenses to help us make a decision. Roy has an opportunity to pay no tax on the pension withdrawals up to his personal allowance now, and based on the projections we've done, we're 99% confident that he's going to end up paying more tax than that in the future. At least the basic rate, which makes that decision pretty easy. So let's say Roy decides to make taxable withdrawals from his pension up to the personal allowance. If he has no funds in drawdown already, he's also going to need to take the corresponding 25% tax-free cash from his pension. So after this, he's still going to have a shortfall of £23,240. If he draws now more from the taxable part of the pension, he's going to pay basic rate tax on that. So the question we need to ask is he likely to pay more or less tax than that in the future? Based on our initial projection, it looks like Roy is going to remain a basic rate taxpayer even if he does end up depleting his tax-free buckets. However, we're not 100% confident with that because as we've seen, there is still some risk, a small risk, that his spending inflates faster than tax bands rise. So, he's probably sitting a little bit right of center.

### Second Lens - Legacy Optimisation [9:50]

And in situations like this, sometimes it does actually make sense to just do a little bit of both. But we're now at a point where this is such a finely balanced decision that we need to move on and apply our second lens and ask, which of these buckets would Roy rather preserve from a legacy and inheritance tax perspective. In the past, this lens has almost always pointed towards preserving pensions over ISAs for a number of reasons, but the primary one is that pensions have been outside of our estates for inheritance tax purposes. So, say Roy also has a home valued at £500,000. If he were to die today, between this and his ISA, he would have a taxable estate of £650,000. Each of us has an inheritance tax nil rate band of £325,000 plus an additional £175,000 residence nil rate band if you pass your main residence on to a direct descendant. So, between a couple, it is possible to leave up to a million pounds free of inheritance tax. But let's say that Roy is divorced. So, he's only going to benefit from one set of allowances with 40% IHT then being charged on everything over 500k. So, if after applying our first lens, it still seems like a bit of a toss-up between drawing from pension versus ISA, it would typically make sense to actually draw from the ISA as that would help to reduce the size of your estate, or at least it would in Roy's situation. And then that would also enable him to preserve his pension, which could then be passed on to future generations free of inheritance tax and potentially even free of income tax, too. But this is the thing. Pensions were never designed to be used as a legacy planning vehicle. In fact, the rules that enabled this to happen had actually only been in place since 2015. Prior to that, in many cases, a 55% tax charge was actually applied to any unused pension assets on death, which is actually really important context for understanding why the government has then decided that from April 2027, pensions will no longer fall outside of our estates for inheritance tax purposes. So, given this rule change, what does this mean for people like Roy? Well, firstly, the IHT on his estate is going to jump by £200,000. The other problem is that IHT nil rate bands have also been frozen until 2031. So, although yeah, he can still pass on £500,000 free of inheritance tax, and that might sound generous today, it might not sound that generous in the future. Then, in terms of where Roy should draw the rest of his income from, from a legacy perspective, which bucket would Roy rather preserve, and which bucket would he rather draw his income from? From April 2027, the tax benefits of an ISA and the tax-free part of the pension are actually going to be almost identical. So, the first and perhaps easiest question to answer is would Roy rather draw from the taxable part of his pension or draw on a tax-free bucket? For every £10,000 of expenditure that Roy covers from the taxable part of his pension, he's going to have to withdraw £12,500 from his pension as he's going to have to pay basic rate tax on his withdrawals. So, from a legacy perspective, would Roy rather preserve £10,000 of, say, his ISA or £12,500 of taxable pension? Of course, if Roy is really unlucky and he actually dies before April 2027 when these rules come into effect, he's obviously going to wish that he drew down from his ISA. But, from that point, both of these buckets will be inside of his estate for IHT purposes. So, let's assume that 40% IHT is going to come due, which would leave then his beneficiaries with either £6,000 of cash or £7,500, but that is money that is still inside a pension wrapper, which they could draw down at any time. The key question then is how much income tax are Roy's beneficiaries likely to pay when they draw that money from the pension. If they end up paying at 20% income tax, then we're in exactly the same position. But, what if they don't? You see, if you die after the age of 75, then whoever inherits your pension will have to pay marginal rates of income tax when they draw it down, just like you have to. But, if you die before the age of 75, then they won't have to pay any income tax at all. For a 60-year-old man, according to the ONS, there's about a 20% chance of dying before the age of 75. 15% if you're a woman, and as a couple, that means that there's about a 33% chance that at least one of you is going to die before 75. So, there's a meaningful chance that this could happen. What's more is that if Roy was married and he was the first to die and he left his pension to his spouse, they could draw the money from his pension free of any income tax, and there would be no inheritance tax to pay because there is no IHT when you're leaving assets to your spouse. However, when his spouse eventually dies, there may ultimately be IHT to pay at that point. But, if they have an income tax-free pension that they can draw down from, that's going to make spending and gifting much easier and help them to reduce the size of their estate. Then, if Roy dies after 75, yes, his beneficiaries would then have to pay marginal rates of income tax on any pension withdrawals, but this is where he could be tactical and specifically leave his pension to someone with low or no income, perhaps young grandchildren, who can use their personal allowance and potentially draw that money out to completely free of tax. So, from this perspective, the only situation where preserving the ISA would be preferable is if Roy dies after 75 and his beneficiaries are likely to pay higher rate of tax on those withdrawals, but that is something that both he and his beneficiaries have a fair amount of control over. Now, clearly, how valuable these features are will depend on your family's specific situation, but let's say based on Roy's family dynamics, he thinks that there is a decent chance that his beneficiaries are going to pay less tax in the future. So, this second lens is pointing towards preserving the taxable bucket. Our first lens did actually suggest that maybe it does make sense to make some taxable pension withdrawals and pay 20% tax just in case he does end up tipping into the higher rate tax band in the future, but firstly, he's going to be pretty pissed off if he ends up paying 20% tax now and then die shortly afterwards. And secondly, based on our projections, it looks like he's going to have plenty of opportunities to draw more from the taxable part of his pension in the future and pay 20% tax. And at those points, he's going to have a lot more information about his spending patterns and what's going to happen with tax brackets. So, let's say that now he decides to preserve his taxable bucket. The next question we need to answer is from a legacy perspective, which of these tax-free buckets would he rather preserve? On the face of it, they seem almost identical, but let's say that later in life Roy's investments have done well and he now feels confident enough to start making gifts which can help reduce the size of his estate. If Roy withdraws 10,000 pounds from his ISA and then he gives that away, 3,000 pounds of that would be outside of his estate immediately assuming that he still has the annual gifting allowance available. But for the other 7,000 pounds, he's going to need to live for at least 7 years until that then falls outside of is On the other hand, if he instead withdrew 10,000 pounds of tax-free cash and he gave that money away, this could potentially be immediately outside of his estate if he can utilize the gifts out of normal expenditure exemption. However, to qualify, this gift would need to be part of a regular gifting plan. It can't be a one-off. It can't reduce or impinge Roy's current standard of living and crucially, it must be a gift made from income, not capital. So, ISA withdrawals typically don't cut it, but pension withdrawals will, even if it's tax-free cash. We don't have time to dig into the nuances of this particular strategy in more detail, but there is a link in the description of the video if you want to learn more about it. In short, however, this strategy is not without its risks, but if done correctly, it could enable you to pass on significant amounts of money later in life very tax efficiently. So, if Roy thinks this could be useful, well, this could be the deciding factor that pushes him in favor of drawing his income from his ISA and instead preserving his tax-free cash. But before

### Third Lens - Diversification [18:23]

you finalize any decision, I think it's worth applying our third and final lens, which is a lens of diversification and balance. Clearly, now that pensions have been cut down to size, in many situations, the decision of where to draw money from is likely to be more finely balanced. With the success of any one strategy being highly dependent on what happens in the future, with inflation, with markets, with regulatory change. It is impossible to predict what government will be in power or what tax rules and legislation will look like in 5, 10, or 15 years, which is why I think it's so important that you apply the first two lenses based on the rules as you see them now. Otherwise, you're just going to tie yourself in knots. But if after doing that, it still seems like a toss-up between two options, the only true defense against the uncertainty of the future is diversification and making sure they're not overly reliant on any one strategy or any one particular area. So, if you do find yourself in this situation, maybe do a bit of both or lean towards whichever option gives you more flexibility and diversification. So, let's say after applying each of these lenses, Roy decides to cover the rest of the shortfall from his ISA. We can't say for certain what he'll do in

### Step 5 - Decide How to Invest [19:34]

year two, but if the rules stay the same and his goals remain the same, he'll probably do a similar thing. So, now that we know which buckets he's likely to draw from and in what order, we can move on to step five, which is to decide how each of these buckets should actually be invested. For example, if we know he's likely to draw on ISAs in the near term, it probably doesn't make sense to have all of that invested in the stock market. So, if you now want to learn the next step, which is how to build an investment portfolio and manage withdrawals to protect against inflation, you should now watch this video here. As always, thanks for watching and look after yourself.