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Drawdown at a glance

You can take as much or as little from your pot as you want from age 55 onwards.

There are no limits or caps.

You can take lump sums or set up a regular income.

Any money left in your pot remains invested so it has the potential to grow.

​​​You keep ownership and control of your pension savings.

You can pass on any unused funds to beneficiaries when you die.

Drawdown Explained

What is flexible retirement income (pension drawdown)?

Flexible retirement income is often referred to as pension drawdown, or flexi-access drawdown and is a way of taking money out of your pension pot to live on in retirement. It can give you more flexibility over how and when you receive your pension. You can usually take up to 25% of the pot as a tax-free lump sum (within the tax-free allowances). The rest of the pot remains invested, giving it the potential for investment growth. You can then decide if you want a regular income, or amounts as and when you need them. The value of your invested pot can go down as well as up, which means the income isn’t guaranteed and you could run out of money.

How pension drawdown works - Pension drawdown rules​

You might be able to set up a drawdown arrangement with your current provider, or you might need to transfer to a new provider in order to use your pension pot flexibly. Even if your current provider offers this option, you should still shop around other providers to make sure that you’re making the most of your pension money.

Before you transfer, check you won’t lose any valuable guarantees or have to pay charges.

You can usually choose to take up to 25% of your pension pot as a tax-free lump sum when you move some or all your pension pot into drawdown.

The amounts you withdraw after taking your 25% tax-free lump sum will be taxable as earnings in the tax year you take them.

You’ll have to decide where to invest the 75% of your pension pot you move into drawdown.

You should choose funds that match your planned withdrawals and attitude to risk. It’s important to think about your investment choices and when you might want to make withdrawals. Remember, this income isn’t guaranteed as investments can go down as well as up. If you take out too much money too soon you could run out of money.

You can also move your pension pot gradually into income drawdown. You can take up to 25% of each amount you move from your pot tax-free and place the rest into pension drawdown. This is sometimes called phased or partial drawdown.

Changing your mind

You can at any time use all or part of the money in your pension drawdown pot to buy a guaranteed income (an annuity) or other type of retirement income product that might meet your needs.

What’s available in the market will vary at any given time. So you might want to discuss your options with a financial adviser or book a Pension Wise appointment.

How much income to take

You need to carefully plan how much income you can afford to take under pension drawdown, otherwise there’s a risk you’ll run out of money.

This could happen if:

  •  you live longer than you’ve planned for

  •  you take out too much too soon

  •  your investments don’t perform as well as you expect, and you don’t adjust the amount you take accordingly.

You can use our calculator below to help you think about how much income to take.

How to invest your pension pot

If you choose pension drawdown, you’ll need to decide how to invest your pension pot. And it’s important to regularly review your investments.  

Your provider will ask how you want to invest your remaining pot when you move into pension drawdown. You will either need to choose your own investments that match your attitude to risk and objectives for your money. Alternatively, some providers will offer you a choice from simple ready-made investment options which are linked to your retirement plans. These are called investment pathways. They can simplify the decision of how to invest your remaining pension pot after you’ve taken your tax-free lump sum.

You could also use a financial adviser to help you choose.

As with all investments, the value of your pot can go up or down.

Shopping around

Deciding whether pension drawdown is the right option for you is complicated.

Not all pension schemes or providers offer pension drawdown. Even if yours does, it’s important to compare what else is on the market. This is because charges, the choice of funds, the support and flexibility they offer might vary from one provider to another.

Comparing products yourself can be difficult unless you’re an experienced investor.

If you’re looking for products that offer simple ready-made investment options, you can use our investment pathways comparison tool to help you shop around.

Do you pay income tax on pension drawdown?

Any money you take from your pension drawdown pot above the tax-free lump sum will be taxed as earnings in the tax year you take it.

For example, you have a pot of £80,000 and take a tax-free lump sum of £20,000. This leaves you with £60,000 to invest. If you take an income of £3,000 a year from your pension pot and are a basic rate taxpayer, you’ll pay 20% tax and so you’ll get £2,400.

Be aware that if you make large withdrawals, they could push you into a higher tax band. You might be able to reduce the amount of tax you pay by spreading payments and/or moving your money into drawdown over a number of tax years.

If you take a lump sum instead of a regular income, your provider might deduct emergency tax from your payments.

Previously, if the value of your pension savings exceeded £1,073,100, a lifetime allowance charge might apply on any excess. For tax year 2024/25, this is being replaced with the lump sum allowance and lump sum and death benefit allowance.

Tax relief on future pension saving

If you choose to go into pension drawdown and draw an income, but are continuing to save into a pension, the amount you can pay into a defined contribution pension and still get tax relief reduces. This is known as the money purchase annual allowance or MPAA.  

Can you continue contributing to a pension if you move into drawdown?

If you’re planning to take your tax-free lump sum and make further contributions into a pension, you need to be aware of:

  • The ‘pension recycling’ rules. These are designed to prevent people from getting further tax relief on contributions where they have already benefited from tax relief.

  • You could be affected by the pension recycling rules if you plan to use some or all of your tax-free lump sum to significantly increase contributions to a pension.

  • The MPAA. This limits the amount of contributions to a defined contribution pension pot that get tax relief to £10,000.

  • If you’re considering reinvesting your tax-free lump sum into a pension, consider speaking to a financial adviser. They can help you look at whether putting the money back into a pension is the best option for you and help you avoid any pitfalls.​

 

Pension recycling

If you’re planning to take your tax-free lump sum and pay that into the same pension pot or another one, you need to be aware of ‘pension recycling’ rules.

It could be pension recycling if you intend to use the tax-free lump sum to pay into a pension to get tax relief.

If HMRC decide you have broken pension recycling rules, you might have to pay tax on the whole of the original tax-free lump sum. This will be the case even if you only recycle some of the money.

If you’re considering reinvesting your tax-free money into a pension, it’s important to get financial advice.

Means-tested benefits and debts

Taking money from your pension may affect your eligibility for means-tested State benefits. 

A company or person that you owe money to cannot normally make a claim against your pensions if you haven't started taking money from them yet. This also applies to County Court Judgements and Individual Voluntary Arrangements. Once you've withdrawn money from your pension, however, you may be expected to pay.

If you need to clear debts, it’s important to get specialist help before accessing your pension.

Death benefits

You can nominate who you’d like to get any money left in your drawdown pot when you die:

  • If you die before the age of 75, any money left in your drawdown fund passes tax-free to your nominated beneficiaries, if taken as income. From 6 April 2024, however, it’ll be subject to the lump sum and death benefits allowance (LSBDA), if they take it as a lump sum. Find out more in our guide Tax-free lump sum allowances for pension.

  • The money must be paid within two years of the provider becoming aware of your death. If the two-year limit is missed, payments will be added to the income of the beneficiary and taxed as earnings.

  • If you die after the age of 75 and your nominated beneficiary takes the money as income or a lump sum, the money will be added to their other income and taxed as earnings.

A beneficiary might be able to choose to continue drawing down from the pension pot, taking a one off lump sum or buying an annuity. Check what death benefits providers offer. 

Is pension drawdown better than an annuity?

Which retirement option is best for you – or which combination of options – depends a lot on your situation, and what other sources of income you’re likely to have in retirement.

Speak to a financial adviser who’ll be able to give you advice based on your personal situation.

Annuity v Drawdown

Annuity and drawdown are two different approaches to managing your retirement savings and generating income during your retirement years. Each has its own advantages and disadvantages, and the choice between them depends on your financial goals, risk tolerance, and personal circumstances. Here's a brief overview of both:

  1. Annuity:

    • An annuity is a financial product offered by insurance companies that provides a guaranteed regular income stream for a specific period or for life in exchange for a lump sum or periodic payments.

    • With an annuity, you give up control of your lump sum in exchange for regular payments, and the payments can be fixed or variable, depending on the type of annuity.

    • Annuities provide financial security and peace of mind, as you will receive a steady income, often for life.

    • They are suitable for individuals who prioritize a predictable income stream and want to minimize the risk of outliving their savings.

 

Pros of Annuity:

  • Predictable income: Annuities provide a stable income, which can help with budgeting during retirement.

  • No market risk: The income from annuities is not affected by market fluctuations.

  • Lifetime income option: Some annuities offer income for life, reducing the risk of running out of money.

 

Cons of Annuity:

  • Limited flexibility: Once you purchase an annuity, you typically cannot access the lump sum or make changes.

  • Inflation risk: Fixed annuities may not keep pace with inflation, potentially reducing your purchasing power over time.

  • Loss of principal: You may not leave a legacy for your heirs as the principal is often absorbed by the insurance company.

  1. Drawdown (or Withdrawal) Strategy:

    • Retirement drawdown involves managing your retirement savings by withdrawing funds as needed to cover your expenses during retirement. This approach allows you to retain control of your investments.

    • You can set a withdrawal rate, such as the 4% rule, which suggests withdrawing 4% of your retirement portfolio annually, adjusting for inflation.

    • Drawdown strategies offer flexibility, as you can adjust your withdrawals based on changing circumstances and investment performance.

    • You bear the risk of market fluctuations and managing your assets to ensure they last throughout your retirement.

 

Pros of Drawdown:

  • Flexibility: You can adapt your withdrawals based on your financial needs and market conditions.

  • Investment control: You maintain control of your assets and can potentially benefit from market growth.

  • Legacy potential: Any remaining assets can be passed on to heirs.

 

Cons of Drawdown:

  • Market risk: Your retirement savings are exposed to market volatility, which could impact your income.

  • Risk of outliving savings: If you withdraw too much or experience poor investment returns, you may deplete your savings prematurely.

  • Uncertainty: Managing drawdown can be complex and require ongoing financial planning.

The choice between annuity and drawdown depends on your financial goals, risk tolerance, and retirement income needs. Some people opt for a combination of both approaches to enjoy the benefits of guaranteed income and flexibility. It's advisable to consult with a financial advisor to determine the best strategy for your specific situation.

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