In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk.
Question: In July, I will reach state pension age with a private pension worth £6,600. My intention is to withdraw £4,600 and leave the remaining £2,000 invested. However, I’m unsure which option would allow me to access these funds while losing as little as possible to tax. Would drawdown be the most suitable option for my circumstances, or is there an alternative that might better suit my needs? Alternatively, would it be more sensible to withdraw the full amount and reinvest £2,000 in an ISA, rather than keeping it in the pension pot? I’m keen to understand which approach would be most advantageous in terms of minimising tax and maximising the value of my funds.
Answer: It is completely understandable to want to make the very most of a £6,600 pension pot, especially when money is tight and every decision feels that bit more important. Many people arrive at retirement with only one small pot like this, while others have several pots built up across different jobs.
So although I’ll take your question exactly as you have framed it, it is worth remembering that your £6,600 may not be the only pension you hold and that the broader principles apply whether you have one pot or many.
The first thing to understand is how your state pension interacts with tax. The personal allowance remains frozen at £12,570 for the 2026-27 tax year.
The full new state pension for 2026-27 is expected to be around £241.30 a week, which comes to £12,547.60 a year. That means the state pension on its own uses up almost the entire personal allowance, leaving you only a few pounds of headroom before any other income becomes taxable at 20 per cent.
The Chancellor, Rachel Reeves, has confirmed that during this Parliament, pensioners whose only income is the state pension will not be required to pay income tax, even when the state pension rises above the allowance. She has also been clear that this protection applies only to people with no other income at all. The moment you start drawing from a private pension, those withdrawals are treated as taxable income in the usual way.
That brings us to your £6,600 pot. When you take money from a defined contribution pension, you can take 25 per cent of that pot tax-free. On your pot, that means £1,650 comes to you with no tax at all. The remaining 75 per cent would normally be taxable. If you withdrew £4,600 and left the rest invested, the taxable portion of that withdrawal would be charged at 20 per cent, because your state pension would already be using up virtually your whole personal allowance.
You asked whether drawdown is the most suitable route. With a pot of this size, drawdown rarely adds much value. It is designed for larger pensions where you want flexible withdrawals over many years. With such a small amount, the simplest and cleanest method is usually to take the money as what is known as an uncrystallised funds pension lump sum (UFPLS). This pays you 25 per cent tax-free with the remainder taxed, but without any of the ongoing administration that comes with formal drawdown.
The alternative you mention, taking the full amount now and putting £2,000 into an ISA, can make sense for some people but is not especially advantageous here. An ISA shelters gains from tax, but if you have modest overall wealth and no inheritance tax issues, the ISA wrapper doesn’t provide a dramatic benefit. All you are doing is bringing money out of a pension, where it already grows tax-free, into an ISA, where it also grows tax-free.
In fact, if you withdraw more than you need right now, you simply accelerate the point at which you pay income tax at 20 per cent.
The only reason you might still choose that route is simplicity. If you know that the state pension will soon push you above the personal allowance anyway, you may feel it is cleaner to take the small tax hit today and keep the remaining £2,000 in an ISA where it is easy to access without further tax considerations. There is nothing wrong with that approach if it helps you feel more in control.
Whichever route you choose, the difference in long‑term outcomes on a pot of this size is not huge. If you need the money now, take it in the simplest way and accept that a small amount of tax will be deducted. If you do not need it immediately, you can take only the tax‑free portion for now, but the rising state pension means your room to avoid tax later will narrow. What matters most is choosing the approach that makes you feel comfortable and gives you clarity over your finances at a time when that reassurance really counts.
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