Phasing Pension Drawdown to Minimise Income Tax

Pension drawdown offers something that annuities and most other retirement income vehicles do not: control. You decide how much income to take each year, and that flexibility has direct tax consequences. By timing withdrawals carefully — drawing more in low-income years, less in high-income years — it is possible to pay significantly less income tax over a 20–30 year retirement. This guide explains the core phasing strategies, the key tax thresholds to navigate, and how to build a coherent plan.

The Core Principle: Filling the Bands

The UK income tax system operates in bands. Every pound of pension income is taxed according to which band it falls into:

• Personal allowance: £12,570 — tax rate 0%
• Basic rate band: £12,571 to £50,270 — tax rate 20%
• Higher rate band: £50,271 to £125,140 — tax rate 40%
• Additional rate: above £125,140 — tax rate 45%

There is also the hidden 60% band: between £100,000 and £125,140, HMRC withdraws the personal allowance at £1 for every £2 of income. Drawing pension income into this range is particularly inefficient — effective marginal rates reach 60% on each additional pound.

The drawdown phasing strategy is to smooth income across retirement so that as much pension income as possible is taxed at 0% and 20%, and as little as possible falls into the 40% or the hidden 60% band.

The Pre-State Pension Window

One of the most powerful opportunities in retirement tax planning is the period between the day you stop working and the day your state pension begins. For most people retiring in their late 50s or early 60s, this window can be 5–10 years.

During this window, many people have:

• No employment income
• No state pension (not yet 67)
• Pension drawdown as their only income source

In these years, the personal allowance (£12,570) and basic rate band (up to £50,270) are largely unoccupied. You can draw up to £50,270 per year in pension income and pay no more than 20% tax on anything above the personal allowance.

From age 67 onwards, the state pension (the full new State Pension is approximately £12,547 per year in 2026/27, or £241.30 per week) takes up most of the personal allowance. The same level of pension drawdown now becomes less tax-efficient because the state pension has already occupied the lower bands.

The strategic implication: draw more pension income in the pre-state-pension years (taxed at 0–20%), and less after state pension begins (when the effective rate on the same drawdown amount is higher). Front-loading pension drawdown in the gap years is often the most significant tax saving available in retirement.

Avoiding the 60% Marginal Rate Trap

The personal allowance withdrawal creates a particularly punishing trap. If your total income — from all sources — exceeds £100,000, HMRC reduces your personal allowance by £1 for every £2 of additional income. This continues until the personal allowance is entirely withdrawn at income of £125,140.

Within this £25,140 range, the effective marginal tax rate is:

• 40% income tax on the income itself
• Plus 20% effective tax on the lost personal allowance (which would have shielded £12,570 at 0%)
• Total effective marginal rate: approximately 60%

Pension drawdown should be actively managed to avoid drawing into this band. If you anticipate a high-income year — a property sale, a business exit, a large bonus — reduce pension drawdown to compensate. If you have other sources of income already pushing you toward £100,000, consider keeping pension drawdown very low or pausing it entirely.

Conversely, in low-income years, drawing right up to £99,999 — just below the trap — maximises income at the 40% rate and preserves the personal allowance.

The State Pension Interaction

When the state pension starts at 67, it begins to occupy the personal allowance. With a full new State Pension of approximately £12,547 per year in 2026/27, the personal allowance (£12,570) is almost entirely consumed.

This means that from age 67 onwards:

• Pension drawdown income of £1 (the first pound above the state pension) is immediately taxed at 20%.
• The tax-free band available to drawdown income is almost nil.

This is precisely why drawing down heavily before age 67 — while the state pension is not yet in payment — makes such a significant difference. Each pound drawn from the pension pot during the pre-state-pension years costs 0–20p in tax. After state pension starts, that same pound costs 20p from the first pound.

Using ISA Withdrawals to Supplement Drawdown

ISA (Individual Savings Account) withdrawals are tax-free and, crucially, do not count as income for any tax purpose. They do not affect:

• Your taxable income band
• Your personal allowance (no interaction with the £100,000 taper)
• Tax credits or benefits calculations

This makes ISAs an ideal supplement to pension drawdown, particularly in high-income years. If pension income is already pushing toward a higher tax band, using ISA withdrawals instead avoids tipping over the threshold.

Example: A retiree has state pension of £12,000, DB pension of £20,000, and wants additional income. Drawing £30,000 more from a SIPP would push total income to £62,000 — well into the 40% band. Drawing only £18,270 from the SIPP (keeping total to £50,270) and supplementing with £11,730 from ISA savings achieves the same income level with no higher-rate tax.

The ISA cushion is particularly valuable in years with exceptional income — property sales, unexpected receipts — when the goal is to suppress taxable income while maintaining spending.

Managing Multiple Pension Pots

Many retirees hold several pension pots accumulated across different employers over a career. The order in which you draw from these pots can affect the tax outcome.

Small pots first: UK tax rules allow trivial commutation of pension pots below £10,000 each (up to three personal pension pots) or below £30,000 total. These can be taken as a single lump sum, with 25% tax-free and 75% taxed as income. Clearing small pots early simplifies the overall picture and can be done in low-income years.

Preserve the largest pot for phased drawdown: The largest pension pot offers the most flexibility and is often best preserved for strategic, year-by-year drawdown rather than accelerated early withdrawal.

Consider the pension input period: If you are still working and contributing to one pension while drawing from another, the Money Purchase Annual Allowance (MPAA) of £10,000 applies once any flexi-access drawdown begins. This limits future contributions. Plan accordingly.

Phasing and the Lump Sum Question

Drawdown also interacts with the tax-free lump sum. Up to 25% of a pension fund can be taken as a Pension Commencement Lump Sum (PCLS) free of income tax (subject to the lump sum allowance of £268,275 across all pensions).

Many retirees take the full 25% tax-free cash at outset. But an alternative approach — "phased drawdown" — involves moving only part of the fund into drawdown at a time, taking the tax-free cash entitlement associated with each tranche. This defers the tax-free cash and income into future years, allowing more flexible year-by-year planning.

Phased drawdown is particularly useful for those who want to avoid taking large amounts of income in any single year, or who want to extend the availability of tax-free cash over a longer period.

Practical Implementation: A Phasing Checklist

A robust drawdown phasing plan typically addresses:

1. Map all income sources — state pension start date, any DB pension in payment, rental income, part-time work.
2. Identify the gap years — the pre-state-pension window is the primary phasing opportunity.
3. Calculate the band capacity — how much pension income can be drawn at 0% and 20% in each year?
4. Model the 100K trap — ensure no year of pension drawdown combined with other income breaches £100,000.
5. Plan ISA supplementation — use ISA withdrawals to maintain spending in high-income years without increasing tax.
6. Review annually — income tax thresholds, state pension rates, and personal circumstances change; the plan needs revisiting each year.
7. Coordinate with carry-forward — if you are still contributing (pre-retirement), consider front-loading contributions in high-income working years to reduce current tax, then drawing in the lower-rate retirement years.

How Global Investments Can Help

Drawdown phasing sits at the intersection of pension planning, income tax management, and long-term cash flow modelling. Our advisers model income year by year — mapping state pension start dates, DB pension payments, ISA resources, and SIPP values — to identify the optimal drawdown sequence for your situation. We help clients avoid the common errors: taking pension income in high-income years unnecessarily, triggering the 60% marginal trap, or drawing too conservatively and leaving avoidable tax behind. Speak to our team about a retirement income plan tailored to your full financial picture, including any overseas income or residency considerations.