When determining how best to draw income from your investments in retirement, it’s important to consider both the funding of your own future needs, as well as the tax implications. Here are the key points to consider.

Working hard to build up your investments during your working life, and finding the balance between enjoying retirement and planning to mitigate the Inheritance Tax (IHT) payable on your death, can be a balancing act. On top of that, Income Tax and Capital Gains Tax needs to be considered when determining how to draw on your investments.

You may have built up a varied array of assets during your working life, such as pension plans, savings, including ISAs and other investment accounts or bonds, shareholdings and rental properties etc. For many of these sources, the income and gains will be subject to tax as they arise, with the exception of Individual Savings Accounts (ISAs), certain bonds and pension plans.

Pensions

Funds held in pensions at death are currently outside of the IHT net, but the changes announced in the Autumn Budget 2024 are anticipated to bring pension savings within the scope of UK IHT from April 2027. 

Up to 25% of your pension pot can be taken tax free during your lifetime and the remainder can be taken as income, as determined by you, or left untouched. Any funds taken out of your pension may be used for making a gift to your loved ones, but unless you survive seven years after making the gift, IHT may be payable. 

Aside from ISAs and some investment bonds, most other assets will generate income or gains that are taxed as they arise, while the income and gains within a pension fund will roll up tax free. 

From an estate planning perspective, prior to the announcement in the Labour party’s first budget, it was advisable to hold on to pension funds and instead, draw from other sources of income during your lifetime. However, the changes expected to take effect from April 2027 are seeing a shift in the strategy of drawing from investments in retirement. Each individual's position will, of course, depend on the make-up of their asset base, the tax treatment of their other income sources, and legislation at the time.

Investments 

ISAs

Funds in an ISA at death are subject to IHT, and this is a point that is often overlooked. Only transfers to spouses from ISAs would be free of IHT, and the surviving spouse may pass the funds into their own ISA by way of an additional permitted subscription.