Phased Pension Drawdown

Phased income drawdown is a flexible way of taking income from your pension gradually. Phased pension drawdown can provide a more tax-efficient and controlled approach to retirement income, but you need a proper plan. Here, we’ll explain what phased drawdown pensions involve, how it works, the rules, and how to set them up.

What is phased pension drawdown?

It’s a method of taking income from your pension pot that involves moving only part of your pension into drawdown at a time, using funds gradually instead of accessing (crystallising) the full pot in one go.

So, a key benefit of phased drawdown is that it allows you to spread your tax-free allowance over time rather than using a single lump sum (that can be difficult to manage).

How does it work?

With phased income drawdown, you access your pension in stages over time, rather than all at once. Typically, phased pension drawdown involves:

• Moving a portion of your pension into drawdown

• Taking up to 25% of each portion tax-free

• Potentially paying income tax on the other 75% of the portion

• The rest of your pension remains uncrystallised

Phased income drawdown example

Below is a simplified phased income drawdown pension example based on these assumptions:

• Total pension pot is £400,000

• No other taxable income (to keep tax simple)

• Ignoring investment growth (for simplicity)

• £20,000 post-tax income needed every year

• Current phased drawdown rules apply

At retirement, you decide to access your pension using phased drawdown and you:

1. Move £80,000 into drawdown

2. Take £20,000 as tax-free income

3. The remaining £60,000 in drawdown stays invested

4. The rest of your £320,000 pension pot remains uncrystallised

Then, in the following year, you could take another £20,000 worth of income from that £60,000, but because you’ll be paying tax on some of the money, to get to £20,000 net income (after taxes), you’ll likely need to withdraw more than £20,000.

Alternatively, you could move another portion of your pot into drawdown and take more tax-free cash. So you repeat the process with new portions of your pension, spreading tax-free cash and taxable income across multiple tax years.

As you can see, some proper planning for phased income drawdown is essential if you want to minimise the tax you pay and arrange your income efficiently throughout your retirement.

Pension rules for phased drawdown

Phased pension drawdown follows the same core rules as flexi-access drawdown with another defined contribution (DC) pension, but there are a few important points to understand:

• Minimum amount: There is no strict pension phased minimum drawdown amount you must move. You can crystallise relatively small portions of your pension each time; however, your pension provider may have minimum requirements.

• Access age: You can normally use phased drawdown from age 55 (rising to 57 from 2028), but access age may depend on your pension provider and particular scheme.

• Tax-free cash: Each time you crystallise a portion of your pension, up to 25% of that portion can usually be taken tax-free, subject to your Lump Sum Allowance (£268,275 total maximum amount of tax-free cash you can currently take).

• Tax on income: After any tax-free portion of the withdrawal, any drawdown income may be taxed at your marginal tax rate (20%, 40%, or 45%). So, large withdrawals in a single year may push you into a higher tax bracket, but a phased drawdown approach can help mitigate this.

• Money Purchase Annual Allowance (MPAA): Taking any taxable income from your pension usually triggers the MPAA, which means your future pension contribution allowance typically drops from £60,000 to £10,000 per year (based on current rules).

How to put a pension into phased income drawdown

Putting a pension into phased drawdown before taking income is usually a multi-step process:

1. Review your pension value, income needs, and tax position

2. Decide how much of your pension to crystallise initially

3. Choose whether to take tax-free cash, taxable income, or both

4. Ensure your remaining investments are suitable for drawdown

5. Complete phased drawdown paperwork with your provider (or switch providers if needed)

6. Repeat the process and adjust over future years as required

Because each phase can affect tax, allowances, and long-term sustainability, many people choose to get professional advice before setting this up and moving any funds into drawdown.

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Phased pension drawdown calculators

A phased pension drawdown calculator typically estimates:

• How much tax-free cash you could release each year

• How much taxable income you may need to take

• How long your pension could last based on withdrawal rates

However, calculators rely on basic assumptions about:

• Investment returns

• Inflation

• Tax rates

• Pension fees

• Life expectancy

So, they can be useful as a starting point, but they can’t accurately model personal tax planning, allowance usage, or sequencing decisions.

That’s why speaking to a pension adviser is often the best way to calculate realistic, personalised phased drawdown figures based on your full financial picture and retirement goals.

Pros and cons of phased pension drawdown

Pros

• Spreads tax-free cash over multiple tax years

• Can smooth income tax compared to full drawdown

• Keeps more pension funds invested for longer

• Offers flexibility if income needs change

• Useful for phased or semi-retirement

Cons

• More complex to manage than full drawdown

• Requires careful tax planning

• Investment risk remains throughout retirement

• Charges may apply each time drawdown is set up

• Poor decisions early on can affect long-term income

Alternative options to consider

Phased drawdown isn’t right for everyone. Other options for accessing income in retirement include:

• Full flexi-access drawdown: Crystallising the whole pension at once and using drawdown.

• UFPLS withdrawals: Similar to a phased drawdown, but involves taking ad hoc lump sums, with 25% of each payment tax-free.

• SIPP drawdown: You could look into transferring your pension into a self-invested personal pension (SIPP) for greater investment options (including commercial property).

• Annuities: Converting part or all of your pension into guaranteed income for life (or a fixed period) with an annuity.

• Equity release: Using something like a drawdown lifetime mortgage to access money tied up in your home.

• Blended approaches: Combining drawdown and annuities for balance

The right option often depends on your income needs, health, risk tolerance, and tax position. So, a proper plan of action is crucial.

Why choose Money Helpdesk for your pension needs?

Deciding how and when to use phased pension drawdown for income can have a long-term impact on your tax burden and standard of living in retirement. It’s rarely something to rush or dive into without guidance.

Here’s why people trust us when they’re exploring phased income drawdown and retirement planning:

• Access to independent, FCA-regulated pension advisers

• Free initial pension chat with no obligation to proceed further

• Personalised advice on phased drawdown for tax and income efficiency

• Help comparing providers, drawdown options, and fees

If you’d like a free initial discussion with a qualified pensions adviser about phased income drawdown, you can get started here.