What is pension drawdown?

What is pension drawdown?

Pension drawdown, or income 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 flexibility is a big selling point, but it's your responsibility to carefully manage withdrawals so your savings last as long as they need to. 

Is pension drawdown a good idea?

Pension drawdown is worth considering if…

• You're happy to keep your money invested 
• You want the flexibility to take money out as and when you want
• You want to be able to vary your income from one year to the next

Pension drawdown might not be the best option if…

• You want a guaranteed income each year
• You're worried that you might run out of money
• You don't want to be exposed to investment risk in retirement

How much does pension drawdown cost?

Drawdown providers typically charge annual fees as a percentage of your pot, and these can vary depending on the value of your pot. 

In our latest analysis of 14 drawdown providers, charges ranged from 0.22% to 1.31%.

Don’t forget that you’ll also be paying fees on the individual investments in your drawdown plan. 

• Find out more: best pension drawdown providers 2025

How much tax will I pay when using pension drawdown?

The first 25% of your pension pot can be taken tax-free, up to a maximum of £268,275. 

Any subsequent withdrawals you make from your drawdown pot will be taxed in the same way as income:

• If you have no income from other sources, the first £12,570 is tax-free
• You then pay tax at 20% on any amount between £12,570 and £50,270
• You then pay tax at 40% on anything between £50,270 and £125,140
• You then pay tax at 45% on anything above £125,140.

So if you took out £50,270, and had no other income, you'd have a tax bill of £7,540 after taking your £12,570 tax-free allowance into account.

The income tax rates shown above apply in England, Wales and Northern Ireland. Income tax rates in Scotland are different. 

• Find out more: how pension income is taxed

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What happens to my pension drawdown plan when I die?

It depends how old you are at the time of your death.

If you die under the age of 75

Any money left in a pension by someone who dies under the age of 75 can be inherited tax-free. This can be taken by your beneficiaries as a regular income from your drawdown plan, or as a lump sum.

If you die over the age of 75

The beneficiaries of your pension will have to pay income tax when they come to take this money, whether as a lump sum or as a regular income from a drawdown plan.

Will my pension drawdown plan be subject to inheritance tax?

Under current rules, pensions are not usually included as part of a person’s estate for inheritance tax purposes.

But in the Autumn 2024 Budget it was announced that pensions will be brought within the scope of inheritance tax from April 2027.

This means that any money left in defined contribution pensions or drawdown plans when you die will be counted as part of your estate and so could be subject to inheritance tax.

Income tax will still be charged on the remaining money in your pension if you're 75 or over when you die. 

• Find out more: inheritance tax explained

Can I still save into a pension if I use pension drawdown?

You can contribute a maximum of £60,000 a year to a pension - known as the pensions annual allowance. But once you enter drawdown, the rules change.

As soon as you take more than your 25% tax-free lump sum, the amount you can contribute to a pension each year while still benefiting from tax relief falls to £10,000.

This limit is called the 'money purchase annual allowance' (MPAA), and covers contributions made by you as well as any made by your employer.

This rule doesn't apply if you entered drawdown before April 2015 and have what's known as a capped drawdown plan. In this case you can still contribute £60,000 a year to your pension while receiving tax relief.

How do I arrange pension drawdown?

Not all pension providers offer drawdown. This means that you might need to first transfer your pension to a different scheme.

Either way, it's well worth comparing drawdown providers first, as charges can vary considerably. 

• Find out more: pension drawdown plans compared

What are investment pathways?

Investment pathways are an initiative launched by the Financial Conduct Authority in 2021 to help drawdown customers who don't get financial advice to make investment decisions.

They are a range of ready-made investments chosen by a provider on your behalf (if you don’t wish to pick your own), which are geared towards four broad retirement objectives:

• Pathway 1: you have no plans to touch your money in the next five years
• Pathway 2: you plan to buy an annuity within five years
• Pathway 3 (the most popular): you plan to start taking money as a long-term income within the next five years
• Pathway 4: you plan to take out all your money in the next five years

While investment pathways are designed to help you enjoy a better income in retirement and reduce the number of people holding too much of their pension in cash, they’re not tailored to your specific circumstances. 

If you’re not an experienced investor, the best way to ensure your money is invested appropriately for you and that your withdrawals are sustainable is to enlist the help of a regulated independent financial adviser.

• Find out more: how to find a financial adviser

How do I make my drawdown income last?

Drawdown customers have conventionally been told to limit withdrawals to around 4% of the value of their pot each year to ensure their money lasts. 

However, the 'right' withdrawal rate for you will depend on your circumstances.

The timing of withdrawals is also important to consider. 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. 

What are the alternatives to pension drawdown?

Pension drawdown isn't the only way to turn your pension savings into an income in retirement.

Annuities

Buying an annuity involves swapping some or all of your pension savings for a guaranteed regular income that will last for the rest of your life (or for a fixed period, if you choose).

Unlike drawdown, you'll have certainty over the amount you'll get each year and there's no investment risk involved.

Check your annuity options

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One-off lump sums

You can make regular ad-hoc withdrawals from your pension.

The technical term for this is 'uncrystallised funds pension lump sums (UFPLS)'. With this option, you can take all your pension in one go, or a series of smaller lump sums as and when you want, similar to drawdown.

The first 25% of any withdrawal will be tax-free (up to £268,275), with the remaining 75% subject to income tax.

• Find out more: What to consider when taking a lump sum from your pension