Pension Drawdown Guide

If you’re approaching retirement or looking to take more control over how and when you access your retirement savings, pension drawdown could be a flexible and tax-efficient option. Here, we’ll cover everything you need to know about how it works, the rules, calculating drawdown rates, and where to get expert support.

What is pension drawdown?

Put simply, pension drawdown is a way of taking money from your pension while keeping the rest invested. It gives you more flexibility than traditional retirement income options like an annuity, because you can choose how much you take and when.

This option is only available with defined contribution (DC) pensions, and not with defined benefit (DB) schemes (unless you transfer them). The most common form is known as flexi-access drawdown, which allows you to take a 25% tax-free lump sum upfront or in stages, with the rest staying invested and accessible.

How does it work?

If your savings are in a pension drawdown plan, you can choose how much income to take and how often. For example, you could:

• Take a one-off lump sum.

• Withdraw income monthly, quarterly, yearly, or on an ad-hoc basis.

• Leave funds untouched to grow until you need them.

Your remaining pension pot remains invested, and the underlying value can fluctuate, depending on market performance. You can change your income level or stop withdrawals at any time if you need. This can provide you with some flexibility in terms of tax efficiency and allow for adjustments based on market conditions.

Pension drawdown rules

Pension drawdown comes with a few key rules. Here are the main regulations and limits to keep in mind:

• You must be over 55 to access pension drawdown (rising to 57 from 2028).

• You can usually take up to 25% of your pot tax-free (subject to your Lump Sum Allowance of £268,275).

• After the tax-free lump sum, withdrawals are taxed as standard income under the PAYE system.

• If you take taxable income, your annual pension contribution allowance reduces from £60,000 to £10,000 due to the Money Purchase Annual Allowance (MPAA).

• There are no minimum or maximum income limits under flexi-access drawdown (unlike the older capped drawdown).

• You can continue to contribute to your pension, but there are limits if you access it on a flexible basis.

All drawdown products must be offered by FCA-authorised providers, and any “uncrystallised funds” (meaning you haven’t accessed them) will remain eligible for investment growth and can be passed on as a tax-free death benefit (in some cases) if you die before age 75.

Do you need a pension adviser?

It’s not mandatory to speak with an adviser, but pension drawdown can be complex, especially if you’re relying on it for retirement income and need to navigate your tax position. An independent financial adviser can help you:

• Decide on a pension drawdown rate to help you withdraw sustainably.

• Manage your investments appropriately for income and growth.

• Improve your tax efficiency and aim to minimise your tax burden.

• Prevent you from running out of money later in life.

• Remove the worry and stress of managing your retirement finances on your own.

If you're unsure about whether to draw down or buy an annuity, or how your withdrawals affect things like inheritance tax (IHT) or means-tested benefits, advice can make a real difference.

Pension drawdown rates and how to start

There’s no one-size-fits-all fixed rate for pension drawdown. How much you can safely take from your pension depends on your pot size, investment returns, scheme charges, and how long you need the money to last.

Here are the basic steps to follow if you want to calculate your drawdown rate and get started accessing your pension:

1. Review your pensions: Determine which of your pensions are eligible for drawdown, ideally through a pension review with an adviser.

2. Transfer to a drawdown provider: Some schemes can’t facilitate drawdown, and you may need to transfer or consolidate your pots if your current scheme doesn’t offer it.

3. Decide on your lump sum: Usually, 25% of your pot can be taken tax-free, but you don’t have to take it all at once.

4. Calculate your drawdown rate: After creating a plan with an adviser, you can work out how much and how often you’ll draw down to maintain the lifestyle you want.

5. Ongoing reviews: Everything changes, markets shift, and your financial needs evolve, so you may need to adjust your course over time.

Many advisers use modelling tools to forecast your income sustainability. A common starting point, as a rule of thumb for a safe drawdown withdrawal rate, is typically 3% to 4% annually, adjusted for inflation.

Connect with an independent pensions adviser

Get Started

How your pension drawdown is calculated

There’s no exact formula, because it will depend on your lifestyle and needs, but here’s a general overview of what goes into pension drawdown calculations:

• Pot size: The total value of your pension(s).

• Investment growth: Projected returns (often 4% to 6% before inflation).

• Lifespan: Your health, family history, and expected retirement length.

• Lifestyle: How much you need or want to spend to maintain your standard of living.

• Inflation: Whether you want to adjust your income over time to account for rising prices.

• Wider economy: Sometimes it makes sense to scale your drawdown up or down based on the economic outlook.

• Tax position: Your drawdown should align with your broader financial situation and tax obligations.

Financial planners may use cash flow modelling or drawdown calculators to stress-test your plan under different market conditions.

Advantages of drawdown

Here’s a quick rundown of the key advantages of a drawdown pension:

• Flexible access to income when you need it.

• Keep your funds invested with potential for growth.

• Pass on any unused funds upon death in a tax-efficient way.

• Choose your investments (potentially with expert support).

• You can combine with annuities or part-time work.

• You don’t have to commit to one method.

Disadvantages of drawdown

Here are some of the potential drawbacks you need to consider first:

• Investment risk, as your pot could fall in value.

• Market volatility can make it challenging to maintain consistency.

• Income isn’t guaranteed (unlike annuities).

• Complex HMRC tax rules, especially if your income fluctuates.

• You may run out of money if withdrawals are too high or investments underperform.

• Ongoing charges from your provider can eat into your returns if not carefully managed.

• Calculating your drawdown rate is difficult without guidance.

Alternatives to consider

Pension drawdown offers flexibility, but it’s not the only way to access your retirement savings. Depending on your needs, you might prefer one of the following options, or use a combination to balance security and flexibility:

Annuities

An annuity converts your pension pot into a guaranteed income for life (or for a fixed term). Once set up, the income amount can’t be changed, but you get certainty and protection against running out of money. They’re particularly useful if you want peace of mind and don’t want to manage investments in retirement.

Uncrystallised Funds Pension Lump Sum (UFPLS)

With UFPLS, you can take lump sums directly from your pension without entering drawdown. Each withdrawal is 25% tax-free, with the rest taxed as income. It's often used for one-off needs (like paying off a mortgage), but you don’t get the ongoing income flexibility or control of a drawdown plan.

Leave your pension invested

If you don’t need income yet, you can simply leave your pension where it is and (hopefully) let it grow. This can be a good strategy if you’re still working, don’t need the money, or want to preserve your Lump Sum Allowance for later. So, keep in mind that investments carry risk and periodic reviews are worthwhile.

Cash in your whole pension

This option lets you take your entire pension pot in one go. It’s usually only suitable for small pots (under £10,000), as doing so can push you into a higher tax bracket and reduce your annual contribution limit via the MPAA (how much you can pay into a pension tax-free). It also means you lose access to tax-efficient investment growth.

Combine drawdown with other options

Many people choose to mix strategies, such as using drawdown for flexible access, an annuity for baseline income, and leaving some funds invested for later life. A blended approach can help manage risk while giving you control over different phases of retirement. This more complex approach usually requires a thorough plan.

Why choose Money Helpdesk for your pension drawdown?

Finding the right financial advice for your pension drawdown can feel overwhelming, no matter what stage of life you're at. Your retirement goals, pension pots, and personal circumstances are all unique. Getting tailored guidance can make a big difference.

At Money Helpdesk, our expert advisers will help you gain some clarity and confidence with your pension. Whether you want to calculate an accurate drawdown rate, improve your investment performance, or ensure you’re on track for retirement, they can help.

Here are some more of the reasons why people trust us to help them with pension drawdown:

• Our advisers are independent, giving you the widest options

• Free initial consultation, with no obligation to go further

• Fully qualified, FCA-regulated financial planners

• Access to pension drawdown specialists with experience in complex cases

Ready for a free, no-obligation initial pension drawdown review? You can get started here.