Pension drawdown
Unlock 25% of your pension tax-free and keep the rest invested with flexible access—pension drawdown gives you freedom and control over your retirement savings.
Access up to 25% of your pension pot tax-free
Withdraw funds as needed
Remaining funds can be passed on tax-free if you die before you reach 75
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What is pension drawdown?
Pension drawdown offers a flexible way to access your pension savings while keeping them invested during retirement. Unlike the pension annuity route, drawdown allows you to take income as and when you need it, while potentially benefiting from investment growth.
To help you manage your drawdown, your provider will typically spit your pension into a drawdown pot and an investment pot. You can usually take up to 25% of your pension as tax-free cash while the remainder stays invested, giving you the freedom to adjust your income as your needs change.
This flexibility comes with responsibility - you'll need to carefully consider your investment strategy, how much income you need, and the tax implications, to ensure your pension savings last throughout your retirement.
Types of pension drawdown
Flexi-access drawdown
The most common and flexible type of pension drawdown, flexi-access was introduced with the pension freedoms in 2015. You can take any amount of income you wish, with no upper or lower limits, though this freedom must be weighed against the risk of depleting your pension pot too quickly.
Access your pensionCapped drawdown
Only available to those who set it up before April 2015, a capped drawdown limits the amount you can withdraw each year to 150% of an equivalent annuity rate. This provides a structured approach to withdrawals with some flexibility. While new capped drawdown plans can't be created, existing ones can carry on.
Access your pensionPartial drawdown
Partial drawdown allows you to move portions of your pension pot into drawdown at different times, keeping the remainder in your pension. This phased approach can help with tax planning, as you can withdraw multiple lots of tax-free cash over time rather than all at once.
Access your pensionUFPLS (Uncrystallised Funds Pension Lump Sum)
UFPLS lets you take lump sums directly from your pension, with 25% tax-free and 75% taxed as income. Each withdrawal follows this 25/75 split, offering a different way to access your pension flexibly.
Access your pensionHybrid drawdown
Hybrid drawdown combines drawdown with other retirement income options, such as using part of your pension pot to buy an annuity. This way, the annuity could be a secure basic income while you keep the rest in drawdown for flexibility.
Access your pensionInvestment-led drawdown
Investment-led drawdown focuses on creating retirement income mainly through investment returns rather than drawing down capital. This is typically suitable for larger pension pots where the priority is keeping funds for inheritance. Your fund manager may target yields of about 3-4% per year while aiming to maintain the original investment.
Access your pension
Pension annuities vs. drawdown
Here are some key differences between the two main approaches to pension income:
Pension annuities
Annuities provide a guaranteed income stream for life in exchange for your pension pot. Predictable income can be appealing if you prefer financial stability and want to avoid the stress of managing investments. You may have smaller returns with a pension annuity, but you'll have the comfort and security of knowing exactly how much will land in your account each month, regardless of market conditions.
Pension drawdown
Pension drawdown keeps your pension invested while allowing you to withdraw money as needed – offering both flexibility and growth potential. This approach could potentially deliver higher overall returns than an annuity, and you maintain control over your investment strategy. If the market is strong, your pot might grow even as you make withdrawals. If you manage withdrawals carefully, you could leave more for later years or inheritance.
Pension drawdown pros and cons
Advantages
- Potential growth: Your pension savings could continue to grow through investment returns while you take income from your pot.
- Death benefits: Your remaining pension could be passed on to your loved ones without inheritance tax implications.
- Income control: Drawing down your pension gives you the flexibility to adjust your income should your needs change in later years.
- Tax management: You can vary your withdrawals and manage your tax effectively by controlling how much taxable income you take each year.
Disadvantages
- Investment risk: Your pension pot is exposed to changes in the market. If investments perform poorly, this could reduce your retirement savings.
- Longevity risk: Without careful management of withdrawal rates and investments, there's a real risk of your pension savings running out during your retirement.
- Complexity: Managing your investments and working out a safe withdrawal rate requires close attention and sometimes professional advice.
- Higher costs: Platform fees, fund charges, and potential advisor fees can make pension drawdown more expensive than simpler options.
What are the alternatives to drawdown?
Drawdown is typically the most popular choice for retirees, with 67% choosing the strategy in a recent study.¹
Pension annuities are growing in popularity but are still the runner-up at 11% (up from 9% in 2020).¹ Offering a guaranteed income for life in exchange for your pension pot, annuities can bring extra security and peace of mind even though the initial income might be lower.
You might also consider a mixed approach, using part of your pension to buy an annuity for essential expenses while keeping the remainder in drawdown for flexibility. You can take a tax-free lump sum gradually through drawdown or all at once, or keep your pot invested without taking income. This can be useful if you have other sources of finance in retirement.
Drawdown fees and taxes
1. Platform fees
The company holding your pension investments will charge an annual fee, typically 0.2-0.45% of your pension savings. Some platforms charge fixed fees instead, which might work out cheaper for larger pension pots.
2. Investment charges
The funds you invest in will charge annual management fees, usually ranging from 0.05% for simple tracker funds to 1% or more for actively managed funds. These fees are taken directly from your investments.
3. Advisor fees
If you use a financial advisor, they sometimes charge initial fees for setting up your drawdown strategy and then around 0.5-1% annually for ongoing advice. While this can work out expensive, professional advice can help you avoid costly mistakes.
4. Withdrawal fees
Some providers charge for each withdrawal you make, typically £10-30 each time. Others structure their withdrawal fees differently, such as:
1. limiting the number of free withdrawals per year, charging after a certain number.
2. offering free regular withdrawals but charging for ad-hoc ones.
3. unlimited free withdrawals if you need regular access, e.g. with a flexi-access drawdown plan.
5. Tax implications
Beyond your 25% tax-free cash entitlement, drawdown income is taxed at your marginal rate. Taking large withdrawals could push you into a higher tax bracket.
For example, if you need £30,000 in a tax year, taking it all at once could push you into the higher tax band (above £50,270 in 2023/24). Instead, splitting withdrawals across tax years (e.g., £15,000 in March and £15,000 in April) could keep you in the basic rate band.
6. MPAA (Money Purchase Annual Allowance)
The MPAA is a limit on how much you can contribute to a pension while still benefiting from tax relief. In the UK, if you withdraw money from your defined contribution pension scheme, the MPAA usually reduces your tax-efficient contribution limit to a set amount (currently £10,000 a year).
This rule is designed to prevent people from accessing their pensions early and then reinvesting the money for extra tax relief. It's triggered by the following:
1. Taking income from flexi-access drawdown
2. Taking an income payment from a flexible annuity
3. Taking more than the 25% tax-free lump sum from a small pension pot
4. Being in flexible drawdown before 6 April 2015
Finding the best drawdown pension plan
As well as using our online comparison tool and drawdown calculator, you should consider the following when hunting for the best pension drawdown.
1. you're over 50
2. you have a UK-based defined contribution (DC) pension or you've inherited one
3. you're able to take your pension early due to ill health.
Our expert says:
"Pension drawdown offers a flexible way to access your retirement savings while keeping your money invested. But with the average retirement now lasting 20-30 years, careful planning is essential for making sure your pension supports a secure and fulfilling later life."
Frequently Asked Questions
How much can I withdraw from my pension through drawdown?
While there's no legal limit on withdrawals, making sensible and sustainable withdrawals is crucial. Many suggest withdrawing 3-4% of your initial pension annually. Adjusted for inflation, this offers a good chance of your money lasting 30+ years.
If you have a £300,000 pension, withdrawing 3-4% means taking £9,000-£12,000 per year initially.
The right withdrawal rate depends on factors like your age, investment strategy, your other sources of income, and your needs at any given time. Market conditions also matter - you might need to reduce withdrawals during market downturns to avoid depleting your pension pot.
What are the pension drawdown tax rules?
You can take up to 25% of your pension as tax-free cash (also called the Pension Commencement Lump Sum) when you move into drawdown. So, with a £200,000 pot, you could take £50,000 tax-free.
You don't have to take all your tax-free cash at once. With a partial drawdown, you could move portions of your pension into drawdown over time, taking smaller tax-free amounts and leaving the rest of your pension invested.
Any withdrawals beyond your tax-free cash are taxed as income at your marginal rate. This is where strategic withdrawals can be cost-effective: you could spread large withdrawals over two tax years so that the lump sum doesn't push you into a higher tax bracket.
Keep in mind that your pension provider might apply an emergency tax code to your first withdrawal, meaning you might have to reclaim overpaid tax.
What happens to my drawdown when I die?
Most pension drawdowns have death benefits, but the specifics can vary depending on the terms of the plan. Generally, if you die before you're 75, your remaining pension can be passed on to your beneficiaries tax-free.
If you’re over 75, the funds can still be passed on, but your beneficiaries may have to pay income tax on their withdrawals. You can nominate multiple beneficiaries and change them at any time.
It's always wise to check the specific terms of your pension plan and consult with a financial advisor to understand how death benefits would apply in your situation.
Can I still pay into my pension while in drawdown?
Yes, but if you've taken taxable income from drawdown and triggered the Money Purchase Annual Allowance (MPAA), your annual pension contribution allowance will have dropped from £60,000 to £10,000. This includes both your contributions and any from your employer.
The MPAA can significantly impact your ability to build up further pension savings, so consider this if you plan to phase your retirement, such as working part-time while saving into a pension.
How often should I review my drawdown?
A mix of market volatility and regular withdrawals could drain your pension pot faster than you think, so it's important to review your drawdown at least annually. You should go over your investment performance and withdrawal plan and work out whether they still suit your needs and circumstances.
Consider working with a financial advisor for these reviews, especially in the early years of drawdown when getting your strategy right is crucial.
How risky is a pension drawdown?
With pension drawdown, your money stays invested in the stock market and other assets, which means it can grow over time but it might also fall in value. So, the investment strategy you choose needs to balance these potential returns with your tolerance for risk.
Your pension pot could fall significantly during market downturns, which could be a challenge if you're also withdrawing income. A "medium-risk" portfolio might target returns of a few percentage points per year over the long term, but could see big short-term fluctuations.
Unlike an annuity, drawdown income isn't guaranteed for life. You need to carefully manage withdrawal rates to ensure your pension savings last.
What are defined benefit pensions vs. defined contribution pensions?
Defined benefit (DB) pensions offer a guaranteed income in retirement based on salary and years of service, with your employer bearing the investment risk. Defined contribution (DC) pensions depend on individual and employer contributions, which are then invested. DC pension income varies based on market performance and the investment risk is on the employee.
DB pensions are less portable but often include inflation protection, while DC pensions allow for easier transfer when changing jobs but lack predictable income and automatic inflation safeguards. Ultimately, DB pensions prioritise stability, while DC pensions are more about flexibility and individual management.
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Additional Information on Pension Drawdown
If you're considering drawdown as a way to access your pension, these official resources can help you understand how it works, what to consider, and how to manage your income sustainably:
