Retirement income · Decision framework

Should I draw my private pension or state pension first?

The order in which you draw retirement income matters — because the state pension is fully taxable, consumes nearly all of your personal allowance, and starts on a date you cannot move. This guide walks through the sequencing logic for 2026/27 and explains what the April 2027 IHT reform changes about the calculation. There is no universally correct answer; this is editorial framing, not a personal recommendation.

By Pension Bible editorial team·Last reviewed 7 May 2026·9 min read

The PAYE arithmetic — why state pension consumes nearly all your personal allowance

The full new state pension for 2026/27 is £241.30 per week, or £12,547.60 per year (rounded to £12,548). The personal allowance — the income you can receive tax-free — is £12,570 per year.

That means once your state pension starts, it uses up 99.8% of your personal allowance. The remaining personal-allowance headroom is only about £22 for any other income. Every additional pound of income — private pension drawdown, employment income, rental income, savings interest above the personal savings allowance — is taxed at 20% (basic rate), 40% (higher rate), or 45% (additional rate) depending on the band.

The state pension is paid gross — HMRC doesn't deduct tax at source — so the tax is collected via your PAYE code on other income, or via Self Assessment if you have no PAYE. This catches many retirees out: they receive the state pension thinking it's "income" and discover at year-end that 20% (or more) is owed back.

The practical implication for sequencing: any year in which state pension overlaps with private pension drawdown is a year where the state pension occupies your tax-free allowance, leaving the private drawdown fully exposed to your marginal tax rate. By contrast, a year in which only private pension drawdown is in payment can use the £12,570 personal allowance against the drawdown income — with private withdrawals up to £12,570 received tax-free (if no other income).

This is why the order and overlap of pension income streams matters. Two retirees with identical pots and identical lifetime spending can end up paying materially different amounts of tax depending on the sequence.

A common sequencing pattern

For most retirees with a modest-to-medium private pot (£100,000–£500,000) reaching state pension age in their late 60s, the conventional sequencing pattern looks like this. The table below is illustrative editorial framing, not a personal recommendation — your specific tax position, life expectancy, marital status, and inheritance priorities will all change the right answer for you.

Worked example: a 65-year-old retiring with a £400,000 pot and target spending of £25,000/year, reaching state pension age at 67.

• Year 1 (age 65): Take £100,000 tax-free cash (25% of £400k). Draw £12,570 from the remaining £300,000 to spend tax-free.
• Year 2 (age 66): Continue drawing £12,570 tax-free from the private pot. State pension still hasn't started.
• Year 3 (age 67, state pension begins): State pension provides £12,548. Private drawdown drops to ~£12,452 (taxed at 20% above the £22 PA residual = ~£2,486 tax). Net spending: ~£25,000 maintained.

Over years 1-2, this retiree spends ~£25,000 each year (£12,570 tax-free drawdown + ~£12,430 from the tax-free cash) and pays £0 in income tax. From year 3, the same £25,000 spending costs them ~£2,500 in tax. The sequence has materially reduced lifetime tax — by drawing the personal-allowance amount before state pension occupies it.

When deferring state pension and drawing private first makes sense

For higher-income retirees, the case for deferring state pension can be stronger than the standard 17-year break-even calculation suggests — because deferring shifts the state pension into a year when other income is lower.

Worked example: a higher-rate taxpayer earning £60,000 reaches state pension age at 66 but plans to retire at 68. Two options:

Option A — Take state pension immediately at 66. State pension £12,548 added to £60,000 salary → all £12,548 taxed at 40% = £5,019 tax. Net gain: £7,529/year.

Option B — Defer state pension by 2 years, retire at 68, then claim. State pension uplift: 2 × 5.8% = ~11.6%, taking the weekly amount to £269/week (£14,000/year). At 68 this is the only income; £12,570 falls within the personal allowance, so only ~£1,430 is taxed at 20% = ~£286 tax. Net annual benefit from age 68 onwards: ~£13,700/year.

Deferral here costs two years of foregone state pension (£25,096) but produces a permanently higher post-tax income afterwards. The break-even depends on life expectancy, but the tax-rate change can make the deferral substantially more attractive than the headline 17-year break-even suggests.

The same logic applies to anyone in the £100,000–£125,140 personal-allowance taper zone. Adding state pension to taper-zone income doesn't just attract 40% tax — it also reduces the personal allowance further, creating an effective marginal rate of 60%. Deferring state pension out of that zone protects substantial tax savings.

For full break-even maths see the state pension deferral guide; for the personal allowance taper interaction see the 60% tax trap calculator and the high earner pension strategy guide.

When taking state pension early and preserving private pot makes sense

The opposite case — claim state pension at SPA without deferral, and preserve the private pot — also has a strong scenario. This is the right call for:

• Retirees with health concerns or shorter expected lifespans. The break-even on deferral is roughly 17 years from SPA. Anyone whose realistic expected retirement is shorter than that loses on deferral.
• Lower-income retirees claiming or eligible for Pension Credit. Pension Credit treats deferred state pension as notional income (the DWP calculates as if you were already claiming it). Deferring provides no Pension Credit benefit but loses the actual cash flow. For low-income retirees, deferral is almost always wrong.
• Retirees focused on inheritance under the post-April-2027 IHT rules. Until April 2027, drawing private pension less and preserving the pot was the standard inheritance strategy because unused DC pots passed outside the estate. From April 2027, that advantage largely disappears (see the section below). Drawing state pension early to preserve private spending (not the pot for inheritance) becomes structurally less attractive.

The Pension Credit interaction is the most under-appreciated of these three scenarios — see the state pension deferral guide for the detail.

The April 2027 IHT reform — does it change the optimal sequence?

Yes, materially. Until 5 April 2027, unused DC pension pots pass outside the estate for inheritance tax. From 6 April 2027, unused pension funds and most lump sum death benefits fall within the estate for IHT (announced in the Autumn 2024 Budget; draft legislation published 21 July 2025; on track for the 2027 commencement date).

For retirement income sequencing, this changes the inheritance-vs-spending calculation in a specific direction:

Before April 2027 (current rules): retirees focused on inheritance had a strong incentive to draw down ISAs first (they're already in the estate) and preserve the pension pot (outside the estate). Many advisors recommended drawing only the personal-allowance amount from the pension and topping up from ISA savings.

After April 2027: that incentive flips for many retirees. With pensions inside the estate from 2027, drawing pension first to spend down the pot before death — preserving ISA balances for inheritance — may now be more tax-efficient. The exception is for couples where the second-death IHT bill matters more than first-death; spouse-to-spouse transfers remain IHT-exempt, so a married couple's first death is unchanged but the second death is materially more expensive for unused pensions.

Why the optimal order may flip: consider a 65-year-old with £500k pension + £100k ISA + £700k house, no spouse, leaving everything to children, planning to spend roughly £400k of saved capital over a 20-year retirement (state pension covers the rest of their needs).

• Pre-April-2027 logic: draw down the ISA first, preserve the pension. On death the residual pension passes outside the estate for IHT — children pay income tax at their marginal rate on withdrawals (because death is after 75), but no IHT applies to the pension portion. The estate at death contains the house plus any remaining ISA balance only.
• Post-April-2027 logic: draw down the pension first, preserve the ISA. On death the pension residual is now part of the estate for IHT (and beneficiaries still pay income tax on withdrawals at marginal rate post-75 — IHT applies first, with a partial credit to avoid pure double taxation). Drawing the pension down during life leaves less in the pension at death, reducing the IHT exposure on that pot.

The headline shift: pre-2027, "preserve pension, spend ISA" was tax-efficient because pensions were outside the estate. Post-2027, that advantage largely disappears, so the relative attraction of "draw pension faster to spend it down" rises. The exact optimal sequence depends on individual circumstances, expected longevity, and whether inheritance or spending security is the priority. For couples, the spouse exemption means most of the change only matters at second death. The pension IHT reform 2027 guide covers the full mechanics.

The interaction with the £268,275 lump sum allowance

The 25% tax-free cash you can take from a pension is capped at the lump sum allowance of £268,275 (2026/27). For most retirees this is academic — 25% of a £400k pot is £100k, well below the cap. But for larger pots it becomes the binding constraint:

• £1m pot: 25% would be £250k — under the cap, fully tax-free.
• £1.1m pot: 25% would be £275k — exceeds the cap. You get £268,275 tax-free; the excess £6,725 is taxed as income at marginal rate.
• £1.5m pot: 25% would be £375k — far above the cap. You receive only £268,275 of tax-free cash; the remainder of the 25% slice can still be drawn but is taxable.

Sequencing implication for large pots: taking the maximum tax-free cash up front is generally still right (it's outside the income tax system entirely), but the amount available is capped. The remaining 75% of the pot must be drawn through taxable mechanisms (drawdown or annuity) and is subject to the same tax-rate-vs-personal-allowance considerations as the rest of the sequencing logic.

For pots exceeding ~£1.07m at retirement, the lump sum allowance is the binding constraint and the sequencing decision needs more careful modelling. Speak to an FCA-regulated financial adviser for any pot above the threshold — the post-LSA mechanics of the 2024 pension reform are complex and the right structure depends on individual circumstances.

FAQ

Can I take my state pension early? No. The state pension can only be taken from your specific state pension age, which depends on your date of birth. SPA is currently rising from 66 to 67 between April 2026 and March 2028; from 6 March 1961 onwards SPA is exactly 67. There is no early-access option.

Can I defer my state pension once I've started claiming? No. Deferral is a one-time decision — you defer by simply not claiming when you reach SPA. Once payment begins, you cannot stop and restart.

Should I take my private pension at 55 if I don't need the income yet? That's a different question and largely about whether to crystallise the 25% tax-free cash early. There's no tax penalty for waiting; the pot continues to grow. The case for taking it early is primarily about IHT (under post-2027 rules, drawing tax-free cash and spending or gifting it removes it from the estate) or about specific cash flow needs. See the pension drawdown guide for detail.

What if I have multiple private pensions? You can crystallise them at different times. Many retirees draw from one pension first (e.g. a workplace pot from a previous employer) while leaving others invested. The sequencing logic between private pensions follows the same tax-band optimisation as private-vs-state — fill the personal allowance first, top up to target spending after.

Does the sequence change if I'm self-employed in retirement? Self-employed earnings count as taxable income alongside state pension and pension drawdown. Continuing to earn at SPA effectively removes the personal allowance from the sequencing calculation — earnings consume the allowance first, then state pension on top is taxed at marginal rate. The deferral case becomes stronger because the state pension years overlap with high-tax earning years.

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Important — this is not financial advice

Pension Bible is a volunteer educational publication. We are not authorised by the Financial Conduct Authority to provide regulated financial advice, and nothing on this page constitutes a personal recommendation. The sequencing examples and tax workings above are general editorial illustration based on UK rules in force at the date of last review (shown in the page header). They do not take account of your personal circumstances — your specific tax position, life expectancy, marital status, other income sources, and inheritance priorities will all change the right answer for you.

Retirement income sequencing is one of the most consequential decisions in personal finance, with permanent implications for lifetime tax, pot longevity, and inheritance outcomes. Before acting on any sequencing decision:

• Pension Wise (over-50s) — free, government-backed, 60-minute appointment by phone or online via MoneyHelper. This is the right first port of call for anyone within 6 months of taking pension benefits.
• MoneyHelper (all ages) — free general pensions guidance via moneyhelper.org.uk.
• An FCA-regulated financial adviser with retirement-income permissions — find one via Unbiased or VouchedFor. Particularly important for pots above ~£250,000 or for anyone with mixed DC/DB benefits.

Always verify any figure or rule that you intend to act on against the original source (gov.uk, HMRC, your pension provider's published documentation) before acting. Tax rules, allowances, the lump sum allowance, and the upcoming April 2027 IHT-on-pensions reform are all subject to change.