What is pension drawdown? 

Pension drawdown is the overarching term for taking income directly from your invested pension pot, and since the 2015 Pension Freedoms, almost all new drawdown arrangements are set up as flexi‑access drawdown (the modern, unrestricted version of drawdown).

Introduced as part of those reforms, alongside the ability to take up to 25% of your pot tax‑free, it allows retirees to choose how much income they withdraw each year while keeping the remainder invested.

Pension drawdown is a method of taking a retirement income from your pension pot as you need it, whilst keeping the rest invested with the aim of generating further growth.

Instead of receiving a fixed income for life, you decide how much income to withdraw and when. This differs from purchasing an ‘annuity’, where you hand over your pot in exchange for a guaranteed income (we’ll cover this option in another guide).

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How does flexi-access drawdown work? 

Flexible pension drawdown works by moving your pension funds into a specific ‘drawdown’ account that allows for variable withdrawals.

1. Move your funds: Not every pension scheme offers drawdown directly. Many older workplace schemes are designed only to build up savings, not to pay it out flexibly in retirement. If your current provider does not support flexi-access drawdown, you will need to transfer your pension to a modern provider or a Self-Invested Personal Pension (SIPP) that does. 
2. Take your tax-free cash: When you move money into drawdown, you are typically entitled to take 25% of the pot as a tax-free cash lump sum, up to a maximum of £268,275. This cap was introduced when the Lifetime Allowance was abolished in April 2024. For most people with pension pots below around £1.07 million, the 25% figure will still apply in practice. You can take this all at once or in stages. . For example, if you have a £100,000 pot, you can take £25,000 immediately tax-free. The remaining £75,000 stays in the drawdown account.
3. Invest the rest: The remaining 75% of your pot stays invested in the stock market, bonds, or other multi-asset portfolios. The goal is to achieve investment growth that helps replenish the money you withdraw, ideally outpacing inflation.‍
4. Set your income: You then choose how to withdraw from the invested 75%. You can set up a regular monthly payment (like a salary), take occasional lump sums for holidays or big purchases, or take nothing at all for certain years. Crucially, every penny you withdraw from this part of the pot is treated as taxable income whenever you take it.

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Investment risks and sustainability

The defining feature of drawdown is that your income is not guaranteed. It is linked directly to the performance of your underlying investments, which means your pension pot can rise or fall in value.

• The sequence of returns risk: This is the danger of a poor market performance occurring just as you start your retirement. For example, iIf your portfolio drops by 20% in year one, and you continue to withdraw your planned income, you are selling assets at lower prices. This depletes your capital much faster than expected and makes it difficult for the pot to recover even if markets bounce back later.‍
• Risk of withdrawing too much: Because there are no guarantees, you need to choose a sustainable withdrawal rate. Historically, many people referred to the ‘4% rule’ (withdrawing 4% of your pot annually), but more cautious approaches such as a 3% withdrawal rate may offer an extra layer of protection against running out of money.

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Is a drawdown pension a good idea?  

Drawdown can be a good idea for those who want control over their pension pot and are comfortable with some investment risk during retirement, but it isn’t the right choice for everyone.

Pros:

• Income flexibility allows you to reduce withdrawals when you can rely on other income to cover your expenses, or take more when your expenses are high or unforeseen. 
• Potential for growth on your remaining invested pot, giving you the potential to keep up with or even outpace inflation. 
• Death benefits, any money left in your pot when you die can usually be passed on to beneficiaries. Learn more.

Cons:

• Your income is not guaranteed, as the invested value of your pot can move up as well as down depending on investment performance.
• There is a risk that your pot could run out during your lifetime, unlike an annuity, which can provide a guaranteed income for life.

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Do you need financial advice? 

Deciding how to withdraw your pension is one of the most complex financial decisions we make in our lives. Because of the risk involved, taking regulated financial advice can be a good idea if you’re feeling unsure about your options.

An advisor can help you stress-test your retirement plan by modelling different scenarios and seeing how this would affect your pot. They can also help you navigate the tax  considerations involved in taking income, helping you avoid unexpected bills and ensuring you don’t accidentally breach your allowances. 

You can also take advantage of MoneyHelper’s free, government-backed Pension Wise service, which helps explain your options for withdrawing money from your defined contribution pension.

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Drawdown death benefits 

One of the benefits of pension drawdown is that any remaining pension savings can usually be passed to your beneficiaries when you die.

• If you die before age 75, any money can typically be inherited by your beneficiaries tax-free. They can take it as a lump sum or as an income.

• If you die after age 75, your beneficiaries can still inherit the remaining pot, but they will normally pay Income Tax on any money they withdraw at their own marginal rate.

It is worth noting that the government has announced plans to bring unspent pension pots into your estate for inheritance tax purposes from April 2027. If this change comes into effect, the tax treatment of inherited drawdown pots would change significantly.

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Annuities 

The main alternative to flexible drawdown is buying an ‘annuity’. This is where you give all, or part of, your pension pot to an annuity provider to purchase a fixed, guaranteed retirement income. 

Annuities are a much lower risk option than drawdown, as it guarantees an income for a fixed period or the rest of your life. You don’t, however, get the same potential growth benefits you could get from a drawdown pot. Read our annuities guide for further information. 

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