What is pension drawdown and how does it work?

When you’ve built up a decent pension pot over many years, you might find it daunting moving from saver to spender as you start taking money out. But there are things you can do to ensure your money lasts as long as possible while getting the income you need to live on in retirement. This brief guide will cover the key things you need to know when you’re ready to move into pension drawdown. We explain pension drawdown rules including what pension drawdown is, how pension drawdown works and whether pension drawdown is right for you.

What is pension drawdown?

If you have a defined contribution pension, the day will come when you’re ready to switch to the drawdown phase - it’s time to reap the benefits of all of your years of saving.

With pension drawdown, you can buy a flexible product that keeps your pension invested in such a way as to give you an income that you can ‘draw down’ (i.e., take out and spend) while continuing to grow the rest of the pot. In this way, it will hopefully continue to meet your income needs in the future.

How does pension drawdown work?

This is only a brief guide to pension drawdown; consider taking professional advice* to give yourself the best chance of your pension going the distance and giving you a good standard of living in retirement. But here are a few basic questions answered to get you started.

Which pension provider should I choose for drawdown?

You’ve been saving into a pension scheme with a certain provider, but you don’t have to stick with them when it’s time to start drawing an income. In fact, you should definitely shop around to find the best drawdown product for you, but do check the fees you will pay on any transfer. For help in choosing the best drawdown provider, check out our article 'How to compare the best pension drawdown providers'.

When can I start my pension drawdown?

The current age at which you can start drawing a pension is 55, but it is scheduled to rise to 57 by 2028. There are some exceptions, such as if you are in poor health, so check the small print of your pension scheme and talk to the scheme administrator if this applies to you.

What is the maximum I can drawdown?

With flexi-access drawdown, you have no limits on the amount of income you can take. You could, in theory, withdraw your entire pot at once. However, this is generally not recommended as it could leave you with a large income tax bill and no funds for the rest of your retirement..

What happens to my money when in pension drawdown?

Money that you don’t withdraw stays invested, so it can grow. It should be in funds that match your appetite for risk and have the best chance of meeting your income goals (a financial adviser can help you get this right). You can choose your own funds, or pick a ready-made portfolio. You might be offered multi-asset funds, risk-rated portfolios, passive funds, or with-profits funds, for example.

Since 2015, all new income drawdown plans that have been set up are called ‘flexi-access drawdown’. Before this time, you could also have a ‘capped drawdown’ plan, which limited how much you could take out of your pension pot to 150% of the income you could get from a lifetime annuity. No new capped drawdown plans are being set up, but if you’ve already got one, it carries on under its existing rules. If you go above the drawdown cap, your tax relief on future pension savings will be reduced.

Flexi-access drawdown allows you to take 25% of your pension pot upfront, tax-free, and there are no limits on how much you withdraw after that. If you wanted to, you could take out the whole lot in one go (but this is not generally recommended!). See below for more on cash lump sums.

What are the pension drawdown rules?

• You have to be aged 55 or over to start drawing money out of your pension.
• You can move it into drawdown a little at a time or all at once.
• You can take 25% of your pot as tax-free cash upfront and keep the rest invested.
• You’ll pay income tax on anything else you withdraw.
• You can take withdrawals as often as you like - monthly, annually, or as one-off lump sums.

Instead of taking the 25% tax-free cash upfront, another option is to take smaller lump sums, where 25% of each withdrawal is tax-free and the rest is taxed as income. This is known as taking an Uncrystallised Funds Pension Lump Sum (UFPLS).

What tax do I pay if I draw down my pension?

Understanding the amount of tax you'll pay on your pension withdrawals is crucial. The tax treatment depends on how you take your money, and two new allowances that replaced the old Lifetime Allowance. We explain these below:

The Lump Sum Allowance (LSA)

This is the maximum amount you can take from your pensions as a tax-free lump sum during your lifetime. For most people, the LSA is £268,275. Any tax-free cash you take will reduce this allowance. If you have more than one pension, it's the total tax-free cash from all of them that counts.

The Lump Sum and Death Benefit Allowance (LSDBA)

This allowance caps the total tax-free lump sums that can be paid out both during your lifetime and on your death. The standard LSDBA is £1,073,100.

Any lump sums you take that exceed your available allowances will be taxed at your marginal rate of income tax. Any income you get from an annuity would also be taxed as income in the same way.

Income Tax

Beyond your tax-free lump sum, any income you take from your drawdown pot is added to your other income for the year (such as from a state pension or earnings) and taxed at your normal income tax rate. The standard Personal Allowance is £12,570 in the 2025/26 tax year. Income above this is taxed at the basic (20%), higher (40%), or additional rate (45%), depending on the total amount. Be aware that taking a large withdrawal could push you into a higher tax bracket for that year.

Pros and cons of pension drawdown

Pros of pension drawdown

• Flexibility - Perhaps one of the main pension drawdown benefits is the flexibility and control it offers. You can take out less or more income as and when you need it, unlike an annuity when you receive the same set amount each year (while potentially locked into a poor annuity rate). This is useful for tax planning as you can hold off taking money out in one tax year if it would push you into a higher tax bracket.
• Your money stays invested - Another is that the majority of your pot stays invested so it can continue to grow over time, so you’re still feathering your nest even when you’ve already hit retirement.

Cons of pension drawdown

• Income can fluctuate - The main ‘pro’ of flexible drawdown could also be considered a ‘con’ in that you don’t get a guaranteed income the way you would with an annuity. Other cons are that it can be hard to compare offerings from different providers as they can be fairly complex. With pension drawdown, your capital is still at risk in the stock market, which might worry some people in retirement who fear losing everything in a market crash.
• You could run out of money - Unlike an annuity, the income is not guaranteed for life. If you withdraw too much, too soon, or your investments perform poorly, you could deplete your fund.
• Fees and charges - Of course, as your money stays invested, you will continue paying fees and charges. Your beneficiaries may also have to pay inheritance tax or income tax on your pot when you die. There's also a risk you may withdraw too much or your investments might tank and you could run out of money, so pension drawdown needs careful management.

Is pension drawdown right for me?

Generally speaking, pension drawdown works for people who don’t need a regular fixed income from their pension pot, perhaps because they have other sources of income too. Having flexibility in what you draw from your pension can help a lot with efficient tax planning. Pension drawdown allows you to keep your options open – you could always use some of your pot to buy an annuity or withdraw it as cash later on if you choose. It could be a good option if you have a large pot and you want to remain invested even once you’re retired.

Things to consider when choosing a pension drawdown provider

You need to consider the range of investment funds on offer and their different risk profiles and volatility, as well as whether a drawdown product will give you access to the market’s best performing funds. You should also think about how you want to access and manage your drawdown plan – for example, is it important to you that your provider has a good digital offering? Also, check the charges you will pay and any extra guarantees you may be able to get.

You’ll also need to think about what a sustainable income would be depending on the size of your pot, your age, your lifestyle, your investments, and how long you might be in retirement. A 2017 study from the University of York found 4% was the magic number you could withdraw from a pension pot as income each year for a comfortable life without taking too much out or leaving too much behind unspent when you die.

But a paper published in 2018 by the Institute and Faculty of Actuaries found that 3.5% is the drawdown rate needed for a sustainable income. So, for example, a healthy person who begins drawdown at age 65 could take £3,500 a year from a £100,000 pension pot and it would be sustainable, the research found. But if they entered drawdown at age 55, the figure would fall to 3%. More flexible approaches, such as dynamic spending, are also gaining popularity. This involves adjusting your withdrawal amount each year based on investment performance, taking less in years when markets are down and more when they are up

We tackle this subject in a recent podcast episode where we explore an alternative to the 4% rule. You can listen to the episode via the player below.

Can I still save into a pension if I draw down my pension?

Yes, you can. However, once you start taking a taxable income from your pension (i.e., anything more than your tax-free cash), you will usually trigger the Money Purchase Annual Allowance (MPAA). This reduces the amount you can contribute to a pension (and still get tax relief) from the standard £60,000 a year down to just £10,000 a year.

What are the risks of pension drawdown?

The main risk is that you’ll run out of money. This could be due to taking out too much too quickly, underperforming investments, or a combination of both. Although you want to maintain your nest egg so it lasts many years, equally you don’t want to be so cautious that you hardly withdraw anything and you struggle to spend and enjoy life. After a lifetime building up your pension fund, make sure you benefit from the financial security it gives you.

Which is the best Pension drawdown provider?

Popular investing platforms such as Interactive Investor*, A J Bell*, Hargreaves Lansdown*, and Charles Stanley* offer drawdown products, as well as the big life and pension companies and asset managers such as Aviva, L&G, Prudential and Scottish Widows. Digital wealth platforms are now starting to offer drawdown options – check out Moneyfarm, Wealthify or J.P. Morgan Personal Investing. Alternatively, you can use a comparison website to see how the different providers stack up.

What happens to my pension when I die?

You can nominate a beneficiary (or multiple beneficiaries) to inherit your pension pot. This can be anyone - it doesn't have to be a spouse or relative. If a beneficiary inherits your pension, they can choose to take it as a lump sum, set up their own drawdown pot, or buy an annuity. The tax your beneficiary pays depends on your age when you die:

• If you die before age 75 - Any money left in your drawdown pot can usually be passed on completely tax-free. This is provided the funds are paid out within two years of the provider being notified of your death.
• If you die on or after age 75 - Your beneficiary will have to pay income tax on any withdrawals they take from the inherited pot, at their own marginal rate.

The inherited funds remain outside of your estate for Inheritance Tax (IHT) purposes. However, it's important to be aware that the government has announced plans to bring most unused pension funds into the scope of IHT from 6th April 2027.

Alternatives to pension drawdown

If you don’t want to opt for pension drawdown, there are alternative options for your pot.

Annuities

The requirement to buy an annuity disappeared when the government introduced pension freedoms in 2015. But, after an initial period of falling sales, annuities have begun to regain some of their popularity. When you buy an annuity, you effectively sell some or all of your pension pot to an insurance company in exchange for a fixed annual payout every year for the rest of your life (a lifetime annuity) or for a set period such as five or ten years (a fixed-term annuity). While some pay poor rates, the security of a regular set income for life is still a tempting option for many retirees.

Cash lump sum

Another option is to take one or more cash lump sums out of your pension but, remember, only the first 25% is tax free, you pay income tax on the rest, so you can find your hard-saved retirement fund quickly eroded by a large tax bill. If you take out too much in one tax year, you could also end up in a higher tax bracket – a double whammy.

You can do a mix of annuities, cash sums and keeping some invested or in income drawdown; there’s no one size fits all. The important thing is that you maximise the worth of your pension and make sure it lasts as long as possible. For this reason, it’s worth considering taking professional financial advice so you don’t make an expensive decision you later regret. To get help choosing a reputable financial adviser, read our guide here.

 

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.

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