Drawing down from your ISA and SIPP without losing money to tax

ISA withdrawals: the simple version

A Stocks & Shares ISA has no withdrawal tax. Ever. You can take money out at any time, in any amount, and you'll pay zero Income Tax, zero Capital Gains Tax, and zero Dividend Tax on it.

This is the single biggest reason to prioritise ISA contributions before investing in a GIA. When you come to spend the money, the ISA never asks for any of it back.

One nuance: if your ISA is a "flexible ISA," you can withdraw and replace the money in the same tax year without it counting against your £20,000 allowance. Not all ISAs offer this. Check with your provider.

SIPP withdrawals: the rules

A SIPP (Self-Invested Personal Pension) works differently. You can access it from age 57 (rising to 58 in 2028). The rules are:

• 25% of your pension pot is tax-free (your Pension Commencement Lump Sum, or PCLS)
• The remaining 75% is taxed as income when you withdraw it
• How much you pay depends on your income tax band in that year

This means the order you draw down matters. Taking large SIPP withdrawals in a single year can push you into a higher tax band unnecessarily.

The tax-efficient drawdown order

Phase 1: Take your 25% tax-free lump sum from the SIPP (or spread it)

You don't have to take the 25% tax-free element all at once. Under Uncrystallised Funds Pension Lump Sum (UFPLS) rules, each withdrawal is 25% tax-free and 75% taxable. This lets you spread the tax-free portion across multiple years.

Phase 2: Use ISA withdrawals to supplement SIPP income

The Personal Allowance is £12,570 (2024/25). If your SIPP withdrawals plus any other income stay below this, you pay zero Income Tax. Use ISA withdrawals to cover anything above that threshold without triggering a tax bill.

Example: You need £25,000/year in retirement. Take £12,570 from your SIPP (within your personal allowance, zero tax) and £12,430 from your ISA (always tax-free). Total tax: £0.

Phase 3: Manage your SIPP withdrawals to avoid higher rate tax

The basic rate band runs to £50,270 (2024/25). If your total income (SIPP withdrawals + State Pension + any other sources) stays below this, you pay 20% on everything above your personal allowance. Carefully managing annual SIPP withdrawals to stay within the basic rate band can save you thousands over a 20-year retirement.

State Pension timing

The State Pension (£221.20/week = ~£11,502/year in 2024/25) counts as taxable income. It arrives on top of everything else, using up most of your personal allowance. Plan your SIPP and ISA drawdown around the State Pension amount, not alongside it as an afterthought.

If you defer the State Pension, it increases by 1% for every 9 weeks you defer. Deferring one year adds roughly £600/year for life. Worth considering if you're still drawing down ISA funds and don't need the extra income yet.

The sequence for halal investors specifically

1. Confirm your SIPP is in a Sharia-compliant fund throughout accumulation
2. At retirement, take 25% tax-free lump sum from SIPP or spread it via UFPLS
3. Keep SIPP taxable withdrawals within your personal allowance
4. Use ISA funds (always tax-free) to top up to your target income
5. Once ISA is depleted, draw remaining income from SIPP within basic rate band
6. Review annually: tax bands and allowances change