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In what order should we draw from our assets in retirement?

These investors want to draw from their retirement assets in the most tax-efficient order
In what order should we draw from our assets in retirement?

These investors want to minimise income tax while maintaining a reasonable income in retirement

They could do this by drawing from more than one pot of income at a time

Their self managed investments are UK orientated so they should diversify these geographically

Reader Portfolio
Dewi and his wife 61 and 57

Pensions, Isa and investment account invested in funds and shares, employer share scheme, equity crowdfunding, cash, residential property.


Fully or partially retire in three years on £25,000 to £30,000 a year, minimise income tax, draw from assets in retirement tax efficiently. 

Portfolio type
Managing pension drawdown

Dewi is age 61 and retired from full-time work four years ago. For a few hours a week, he helps his son run a property business and earns £5,000 to £6,000 a year, and plans to do this until he is 63. Dewi has also been receiving £2,400 a year from a former workplace defined benefit (DB) pension since May last year.

Dewi’s wife is age 57 and earns around £50,000 per year. She plans to work part time in three years.

Their home is worth about £240,000 and mortgage free. “We hope to be able to retire at ages 63 and 60 on a joint annual income of £25,000 to £30,000,” says Dewi. “Our expenditure is around £18,000 a year – excluding holidays. So I would anticipate it to rise to around £22,000 a year when Covid-19 is under control.

"My primary concern is keeping income tax to a minimum while maintaining a reasonable level of income, especially after we start to receive our state pensions.

"I have a pension with a wealth manager worth £292,000 – a former workplace defined contribution (DC) scheme worth £267,000 when I transferred it in 2018. I also have a pension worth £45,000 after contracting out of the state earnings related pension scheme (Serps) .

"A former workplace DB pension will pay me about £6,500 a year from age 65.

"My wife has a DC workplace pension worth about £60,000, to which she contributes £2,100 per month. She has also has a workplace DB pension which should pay her about £2,500 a year from age 65. And she has several other small DB pensions which in aggregate should pay her £2,500 a year from age 65.

"My wife also pays £200 per month into a company share scheme and £25 per month into an investment individual savings account (Isa).

"We recently sold a rental property for £140,000 after a tenant, who owed us six months’ rent, left. We have put £50,000 of the sale proceeds into NS&I Premium Bonds. And we are using a further £60,000 of them to buy a motorhome and replace a car.

"But we wondered how best to draw from our investments? The most tax efficient approach when building up assets is first to invest in pensions, then Isas and finally unwrapped cash. But what is the most efficient way to draw from your assets in retirement? I am not persuaded that drawing first from unwrapped assets such as cash, then Isas and finally pensions is the best order.

"We also wondered which pensions to start drawing from first? I think that it's best to leave the DB ones untouched until the date they are due to start paying out.

"I estimate that my wealth manager pension should be worth more than £315,000 by the time I am age 63 and expect to take this via drawdown. But I am not sure whether to take the 25 per cent tax free entitlement.

"I started investing in an Isa in 2019, which now has a value of about £38,000, and chose most of the funds for it in January 2020 at the start of the pandemic. This is very much reflected their performance, particularly the Legal & General index funds and Aviva Investors UK Listed Equity Income (GB00B6R51K64).

"I intend to continue investing at least until I start collecting my state pension at age 66 and, for example, plan to transfer £20,000 this tax year into my Isa. But what should I invest the money in?"


Dewi and his wife's total portfolio
HoldingValue (£)% of the portfolio
Wealth manager pension292,00045.57
NS&I Premium Bonds100,00015.61
Wife's DC pension60,0009.36
Phoenix (PHNX)7,0611.1
Barings Hong Kong China (IE00B3YV5X70)3,3910.53
Vanguard LifeStrategy 60% Equity (GB00B3TYHH97)3,2380.51
Legal & General UK Index (GB00BG0QPJ30)2,7210.42
Aberdeen Standard European Logistics Income (ASLI)2,4440.38
Legal & General All Stocks Gilt Index (GB00BG0QNW27)2,3000.36
Hipgnosis Songs Fund (SONG)2,1610.34
QinetiQ (QQ.)2,0750.32
Renewables Infrastructure (TRIG)2,0430.32
Clipper Logistics (CLG)2,0090.31
Wife's Isa2,0000.31
Aviva Investors UK Listed Equity Income (GB00B6R51K64)1,8820.29
Dr Martens (DOCS)1,7230.27
Greggs (GRG)1,5180.24
Sage (SGE)1,4620.23
Wynnstay (WYN)1,4700.23
Wife's employer share scheme1,4000.22
J D Wetherspoon (JDW)1,3130.2
Diurnal (DNL)1,1170.17
Equity crowdfunding 4000.06




Chris Dillow, Investors' Chronicle's economist, says:

You don't need an income in retirement – you can instead draw from capital.

You should get almost £14,000 a year from your own and your wife's various DB pensions. And from age 66 you should get a state pension of just over £9,000 each. So after 66 you could achieve your target income without drawing on your other savings. 

If you want to retire before age 66 you will need to run down your other savings. The standard rule of thumb is that you can take 4 per cent of your wealth each year while retaining your capital. But this is only a very rough guide. We don’t know what returns on savings will be in the coming years: they might be more or, more likely, less than 4 per cent. And you don’t necessarily need to preserve capital -– unless you want to leave a big bequest you can run it down.

Running down your savings is just saving in reverse. When I stop working, I’ll first use up savings held outside tax wrappers and then my Isas, leaving my pension until last. I will not generate an income but let my savings run down – just as I might have if I had lost my job at an earlier age. I should be able to do this more or less tax-free for a while, during which time my pension pot can make some tax-free capital gains.

I cannot see why you wouldn’t want to take 25 per cent of your pension tax-free. At its current value, this would give you over £70,000. That could cover four years of outgoings – you don’t need to buy a big-ticket item with your lump-sum.

Taking this cash means missing out on some of the possible investment returns it could generate if you left it in the pension, although you could put some of it into an Isa. But it also means four years of postponing paying tax. And tax is certain while investment returns are not, so this is worth having. If markets fall taking your lump-sum would be a way of avoiding a loss.

So you can live comfortably without a big tax burden.

Your self managed investments have a slight momentum tilt via Clipper Logistics (CLG) and Hipgnosis Songs Fund (SONG), and there’s nothing wrong with momentum. But they are UK-oriented, while the UK market accounts for less than 10 per cent of all equities, something which should be a benchmark for investors' portfolios.

You also seem light on defensive stocks. Cash and gilts (UK government bonds) will better protect your wealth from a market downtown so in this respect it is not a problem. But being light on defensive stocks could be a problem because these do tend to do better than they should in the long-term.

It’s easy to remedy these gaps, though, with future Isa investments. Consider a global tracker fund and perhaps one of the several investment trusts which hold large defensive stocks. Also consider adding a private equity fund because it’s possible that a lot of long-term growth will come from companies that are not yet listed.


Carla Morris, financial planner and Tom Wait, investment manager at Brewin Dolphin, say:

When you retire you don’t have to take an income from one pot at a time. You can withdraw from multiple pots to ensure that you use available allowances. But DB pensions should be left until you reach the selected retirement age, otherwise the income you receive could be significantly reduced.

You will have various state and company pensions starting at different fixed points. So structure income from your other investments and pensions around these as you have flexibility to start, amend and stop these payments.

For example, at age 63 your income will be approximately £2,400, meaning you have unused personal allowance. If you take a combination of tax-free cash and income from your wealth manager pension you could still remain within the personal allowance. You could draw £13,000 via a combination of tax-free cash worth £3,250 and income worth £9,750.

Under current pension rules you don’t have to take your tax free cash all in one go. With a value of £315,000 at age 65, tax free cash would be worth £78,750. Taking it when it is needed gives the pension an opportunity to potentially grow meaning your tax free cash could also increase. 

As pensions start you could reduce other withdrawals. A financial adviser could help you to plan these with a cashflow modelling system.

Continuing to build up your Isas is a good idea as these can provide a tax free income stream or lump sums in retirement.

Your Isa is reasonably concentrated which can lead to a high level of embedded risk. For example, while there is nothing particularly wrong with life insurer Phoenix (PHNX) as a business and it has a high dividend yield. But your weighting to it is arguably putting too many eggs in one basket, both in terms of stock and sector concentration.

The best solution here is to increase the level of diversification in your portfolio. This can be achieved by adding more funds which would add significant diversification as they hold numerous securities and are professionally managed. However, funds have a management charge. So you could instead add more direct equity holdings which would allow you to tilt your portfolio how you want and there is no management charge for these. But you would need 20 to 30 direct equity holdings to ensure sufficient diversification and these require greater ongoing monitoring than funds.

Also, around three quarters of your equity exposure is to UK companies. But to achieve greater diversification and access to a larger opportunity set via some of the world’s best companies it would make sense to take a more global approach. This could done by investing in large market leading companies across various industries such as NVIDIA (US:NVDA), Linde (US:LIN) or Visa (US:V). Or  invest in thematic funds such as BB Healthcare Trust (BBH) and Impax Environmental Markets (IEM), or general global funds including those run by Baillie Gifford, Fundsmith or Comgest.