What is pension drawdown?

With pension drawdown:

• After you've taken your tax-free lump sum (usually up to 25% of your pension pot, subject to allowances) the rest of the money stays invested, so it has a chance to grow
• You can access the money when you need it, but you'll need to make sure you have enough money in retirement
• Like any investment, the value could go down too

What tax will I pay on drawdown income?

You'll pay tax on your income in the following way:

Here are the income tax bands for the tax year 2026 to 2027:

Here's an example of how that could work:

If you received a combined retirement income of £20,000 a year from your State Pension and your pension drawdown, you would pay: 

• 0% tax on the first £12,570 = £0
• 20% tax on the remaining £7,430 = £1,486

So your total tax due for this year would be £1,486. If you took any additional drawdown payments, you might be pushed into a higher tax bracket.

These tax rates apply for England, Wales and Northern Ireland. Rates in Scotland are slightly different, and may change in the future.

What do I need to consider before taking out drawdown?

• Investment knowledge: Do you feel confident managing your investments? Or would you prefer the simplicity of an annuity? You don't have to be an investment expert, but it's important to understand how it works and the risks involved. You might want to speak to a financial adviser before you make any decisions.
• Attitude to risk: Pension drawdown involves investment risk. If your investments perform poorly, your income could decrease. Would you be comfortable with this? 
• Income requirements: Think about how much money you need during retirement. If you want a reliable income, an annuity might be better for you.
• Life expectancy: If you have health issues, an enhanced annuity might be more suitable for you. This gives you a higher income if you have a shorter life expectancy. If you live a long time, you might use up all your pension savings.
• Tax: Withdrawing too much from your pension pot each year could push you into a higher tax bracket. 
• Charges: Pension drawdown products have charges that can reduce your retirement savings.
• Inheritance: If you want to leave some of your pension to your loved ones, drawdown might be better. It can be passed on tax-free if you die before age 75 (subject to the Lump Sum and Death Benefit Allowance). Pensions will be included in your estate for inheritance tax from April 2027, though.
• Flexibility: Once it's set up, you can’t cash in or make any changes to a pension annuity. Drawdown gives you the option to access money as you need it. It’s not an either or decision, though - you can combine annuity and drawdown products.
• Professional advice: Pension decisions are complex and have a long-term impact. It's important to get independent financial advice before deciding. Everyone's situation is different, so take your time and make the right decision for you.

How does drawdown affect my benefits?

Taking a lump sum from your pension through drawdown could affect your entitlement to means-tested benefits. These benefits include Universal Credit, Housing Benefit or Pension Credit. It could also affect Employment and Support Allowance, Income Support and Jobseeker’s Allowance.

How often can I take payments on pension drawdown?

Pension drawdown allows you to choose how often you want to take payments. You can take regular withdrawals just like an income or dip into the pot when you need it. There's no limit on how much you can take out each year but large withdrawals could push you into a higher tax bracket and you should be careful that your pot doesn't run out. 

What costs are involved in drawdown?

There are ongoing costs involved in pension drawdown. Here are some examples:

• Set-up fees: These are typically a standard fee or a percentage based on the size of your pension pot
• Administration fees: These are typically a standard fee but some providers may calculate costs based on how much you have in your pension pot
• Withdrawal fees: These are either on the initial 25% tax-free lump sum and/or each additional withdrawal
• Exit/Transfer fees: Moving to another provider might mean you'll have to pay fees based on the size of the pension pot

Is drawdown right for me?

Whether pension drawdown is right for you depends on several factors, and is a completely unique decision that only you can make. Before making any decisions about your retirement income, it’s important to make an appointment with Pension Wise. It's a free government guidance service from MoneyHelper. You might also want to speak to a financial adviser. If you don’t already have one, you can find one at Unbiased.