How much money should I take from my drawdown plan each year?

How does pension drawdown work?

Pension drawdown is a way of taking money out of your pension. You have to be aged 55 or over (57 from 2028) and have a defined contribution pension to access your money in this way.

With pension drawdown, you keep your savings invested when you reach retirement and take money out whenever you choose.

This makes it a more flexible option than an annuity, which pays a fixed income, but it also comes with the responsibility of making sure that the money doesn’t run out.

• Find out more: what is pension drawdown?

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How much can you withdraw using pension drawdown?

There is no limit on how much money you can take out of your pension drawdown plan each year.

Part of the appeal of drawdown is that you can vary the amount you withdraw each year, which might be necessary if you face unexpected expenses.

However, you'll need to decide what is a sustainable level of withdrawal to ensure that your pot lasts as long as it needs to.  

• Find out more: how much will I need to retire?

What is the 4% pension drawdown rule?

To make their money last, pension drawdown customers have conventionally been told to limit withdrawals to around 4% of the value of their fund and then adjust for inflation each year. 

For example, if you have a pot worth £100,000, you'd take £4,000 in year one. Assuming an inflation rate of 2%, you'd then take £4,080 in year two.

The 4% rule, based on a set of assumptions made by American financial adviser William Bengen in the 1990s, is designed to ensure your pot lasts throughout a 30-year retirement.

But it needs to be considered in the context of your own circumstances. For example, if you retire later or have a shorter life expectancy due to health issues, you may decide you can sustainably withdraw a higher proportion of your pension. 

Market conditions will also play a role in your drawdown strategy as the performance of your investments fluctuates.

The table shows how different withdrawal rates could affect the value of your pot over time. It doesn't take into account the fees charged by your drawdown provider. 

• Find out more: pension drawdown calculator - making your money last.

How your income needs can change over time

The 4% rule assumes that withdrawals remain consistent throughout retirement, but in reality, your expenditure is likely to vary. 

For example, you might spend more in the early part of your retirement, perhaps taking advantage of the opportunity to travel. 

You could also face unexpected expenses such as emergency repairs on your property or car that require you to make a larger withdrawal from your pot. 

You’ll probably have other income streams, such as the state pension, savings or money from part-time work, which should also play a part in your decision about how much to withdraw from your drawdown plan.

Managing investment risk in drawdown

Making your money last through your retirement isn’t just about how much you take out each year. You’ll also need to make sure you have the right investment strategy. 

Holding a good proportion of investments in equities will give you more opportunity for growth throughout your retirement (although this also involves greater risk). 

If you’re a cautious investor and invest less in equities, you’ll need to take that into account and consider withdrawing less. 

The timing of your withdrawals is just as important. Ideally, you’d avoid selling your investments when markets are falling, as this can make it harder for the value of your pot to recover.

Another approach is to only take the ‘natural income’ from your investments, such as dividends from shares or interest from bonds. This is likely to mean you get a lower income, but if you can afford to adopt this strategy, it will keep your capital intact, reducing the risk you’ll run out of money.

How are pension withdrawals taxed?

Pension withdrawals are treated as income and taxed accordingly. 

You can take up to 25% of your pension pot as a tax-free lump sum (up to a maximum of £268,275) from the age of 55. Any additional income you take – including from drawdown – will be added to the rest of your income for that year and taxed accordingly. 

You’ll pay income tax on anything above your personal allowance of £12,570. Your pension provider deducts this before income is paid to you.

Bear in mind that withdrawing large sums from your pension could push you into a higher tax bracket and land you with a higher income tax bill than necessary.

Under current rules, pensions aren't subject to inheritance tax. However, from 6 April 2027, any unspent pensions, including money in pension drawdown, will be included in the value of your estate when inheritance tax is calculated. 

This will result in more people having to pay an inheritance tax bill. 

• Find out more: what happens to my pension when I die?