What is a Drawdown Pension?
If you’re getting close to retirement, you might be thinking about how to use your pension money. One popular option is a drawdown pension. This blog will explain what it is, how it works, and whether it could be the right choice for you.
Read on for an easy-to-follow guide on drawdown pensions.
What is a Drawdown Pension?
A drawdown pension (also called flexi-access drawdown) lets you take money out of your pension pot while keeping the rest invested. It’s available to people with a defined contribution pension.
It gives you the freedom to decide how much income you take and when, instead of receiving a fixed amount each month. This can help you manage your money in a way that suits your lifestyle.
But with this flexibility also comes responsibility. You’ll need to keep an eye on how much you’re taking out, how your investments are performing, and how long your money needs to last.
How Does It Work?
You can usually start using drawdown from age 55 (rising to 57 from 2028). Here’s how it works:
You take up to 25% of your pension pot tax-free.
The rest of your pot stays invested in a drawdown account.
You take money from the account when you need it. This could be regular income or occasional lump sums.
The money that stays in your pot can continue to grow, but it can also go down if investments don’t perform well. You’ll need to plan carefully to avoid running out of money later in life.
What Are the Benefits?
Drawdown pensions offer many advantages:
Flexible income – Take what you need, when you need it.
Investment growth – Your money can still grow if your investments do well.
Inheritance – Any money left in your pot when you die can go to your family.
Tax control – You can manage how much you withdraw to stay within lower tax bands.
This flexibility means you can tailor your retirement income to fit your lifestyle, travel plans, or other needs.
What Are the Risks?
Drawdown isn’t the right choice for everyone. Here are some things to watch out for:
No guaranteed income – Unlike some pensions, drawdown doesn’t promise a guaranteed income for life.
Investment risk – Your money is still invested in the market, so it could go down.
Running out of money – If you take out too much, you might not have enough later in life.
Tax bills – If you take large amounts, you could end up paying more tax than expected.
Because of these risks, it’s important to review your pension regularly and adjust your plans if needed.
Who Might Find Drawdown Useful?
A drawdown pension might be a good choice if you like the idea of flexible income, are comfortable taking some investment risk, and have other savings or income sources to rely on. It can also appeal to those who want to leave money to their family and are happy to review their finances each year to keep on track. However, it may not be suitable if you prefer the security of a guaranteed income for life or would rather not manage your pension actively.
Can You Switch Options Later?
Yes. One of the good things about drawdown is that you can change your mind later on.
For example, if you want more stability, you can use some or all of your pension pot to buy an annuity, which gives you a guaranteed income for life. This gives you the option to adjust your retirement plan as your needs change.
How is Drawdown Taxed?
You can take 25% of your pension pot tax-free. The rest is taxable when you withdraw it. You pay tax based on your total income for the year.
Here’s an example:
You take £12,500 from your pension.
£3,125 is tax-free (25%).
The remaining £9,375 is added to your other income and taxed in the usual way.
Taking large amounts in one year could push you into a higher tax band, so it’s worth thinking about how and when you take money.
Also, be aware of the Money Purchase Annual Allowance (MPAA). Once you start taking flexible income, your annual allowance for paying into pensions drops from £60,000 to £10,000. This might affect people who plan to keep working and saving.
Managing Your Drawdown Plan
If you choose drawdown, it’s important to stay involved in your retirement plan. Here are some tips:
Review your plan each year – Check your withdrawals and investments.
Track spending – Make sure you’re not using up your pot too quickly.
Seek advice – A financial adviser can help you make smart decisions.
Plan for later life – Think ahead to what you might need in your 70s, 80s and beyond.
Many people find drawdown works well in the early years of retirement, when they’re active and spending more. Later on, they may switch to a more stable income option.
Final Thoughts
A drawdown pension gives you control over how you use your pension pot in retirement. It offers flexibility, access to investment growth, and the option to leave money to loved ones. But it also carries risks, including the possibility of running out of money.
It’s a good idea to speak to a professional before making a decision, especially if you’re unsure about investment choices or tax.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Inheritance tax planning and Trusts are not regulated by the Financial Conduct Authority.
Approved by InPartnership FRN 192638 August 2025