What is pension drawdown? The basics

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Please note, this only applies where you are taking tax-free cash and moving the remaining pension into drawdown. If you take a UFPLS payment, nothing is moved into drawdown. 

4. What are your withdrawal options with drawdown?

Once money is in drawdown, you can choose how and when to take it. You don’t have to start taking an income straight away.

Your options usually include taking regular monthly withdrawals, ad hoc payments as and when you need them, or leaving your money invested for the time being. Any money left in drawdown remains invested, so it still has the potential to grow. However, its value can also fall. 

5. What are the advantages of drawdown?

• Flexibility - drawdown gives you full control over withdrawals, allowing you to decide how much to take and when to take it. As the money remains in your pension, you also keep the option of buying an annuity at a later date, though you need to remember that annuity rates could change during this time.
• Potential for investment growth - your pension stays invested while it’s in drawdown, meaning it could continue to grow over time, even while you take withdrawals. This could help your pension last longer in retirement. However, once you move a slice of your pension into drawdown, the tax-free cash for that slice is normally based on its value at that point. Any future growth or loss will affect the money left invested in drawdown, not the tax-free cash already taken from that slice.
• Control over your investments - you can choose how to invest the money held in drawdown. As you approach retirement your needs, goals and attitude to risk may change and so will the investments you hold. Drawdown gives you the freedom to make changes whenever you want.
• Legacy planning - your pension can be passed on to beneficiaries when you die - such as your family or charities of your choice. If you die before age 75, your pension can usually be paid to your beneficiaries tax-free. However, there is a limit on how much can be paid as a tax-free lump sum. If you die after age 75, your beneficiaries will usually pay income tax on the money they receive. The amount of tax will depend on their own circumstances. The Government has also announced that, from 6 April 2027, unused pension savings may count as part of your estate for Inheritance Tax purposes. 

6. What are the risks of drawdown?

• Your investments can fall - using drawdown for retirement income means your money stays invested in the markets, and you don’t know what will happen in the future. If markets fall, you may have to reduce your income, or your pension savings could run out sooner than expected.
• Your returns may be lower than expected - as you transition into retirement some investments used while building your pension may not suit you anymore. Holding money in lower-risk investments, such as cash, may feel safer, but it usually means lower returns. Over time, this could increase the chance of your pension running out sooner than expected or providing less income than you hoped for.
• You need to manage your income - drawdown gives you control over your money, but this also means there is more responsibility for you to manage and monitor your income. Taking too much too soon could increase your risk of running out of money. Additionally, your pension pot could go down dramatically if you don’t regularly monitor how your funds are performing.
• You could pay more tax than expected - money withdrawn from your pension is usually taxable, apart from any tax-free cash. Taking large withdrawals could push you into a higher tax bracket, meaning you may pay more tax than expected. It’s important to understand how pension withdrawals could affect your overall tax position before deciding how much to take. 

7. Pension contributions after starting drawdown

You can still pay into your pension after moving money into drawdown. And these contributions can still receive tax relief, subject to pension rules.

However, once you begin taking taxable money out of your pension pot - more than just your tax-free cash - the amount you can pay in and receive tax relief on may be reduced. This is known as the Money Purchase Annual Allowance (MPAA).

The MPAA reduces the amount that can be contributed to your money purchase pensions in any one tax-year while still benefiting from tax relief to £10,000 (compared to the standard annual allowance of £60,000).

You may also face restrictions on carrying forward unused allowances from previous years.

You should also be aware of pension recycling rules. These may apply if you take tax-free cash from your pension and use it to make larger pension contributions than you normally would with the intention of claiming additional tax relief. If the rules apply, you could face extra tax charges.

This won’t affect most people using tax-free cash as part of normal retirement planning. But if you plan to take tax-free cash and continue paying a lot into your pension, it’s worth getting guidance or advice first.

Any contributions you make after the age of 75 aren't eligible for tax relief. 

8. Is pension drawdown right for me?

Drawdown can offer you a flexible way to access your pension in retirement. However, whether drawdown is the right option can depend on your own personal circumstances and income requirements.

Drawdown doesn’t guarantee income therefore it’s important to plan ahead to make sure your income lasts. Tools like our Pension Drawdown Calculator can help you see how long your retirement income might last, if you keep some or all of your pension pot invested and take regular income from it.

Before choosing drawdown, it’s worth thinking about how much income you need, how long your pension may need to last, and how comfortable you are with investment risk. You may also want to compare drawdown with other retirement options, such as taking lump sums, buying an annuity or leaving your pension invested until later.

Find out more about pension drawdown or how it works.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

• Read: Mind the gap: how to retire before State Pension age
• Read: UK pensions dashboards: your pensions, all in one place
• Read: What is a guaranteed lifetime annuity? The basics