Reaching retirement is a real milestone, but it raises a practical question: how do you turn the pension you have built into a reliable income? For years the standard answer was to buy an annuity. Today, many people choose pension drawdown instead, for the flexibility and control it offers. So what is a drawdown pension, how does it work, and is it right for you? This guide explains the essentials.
What is a drawdown pension?
A drawdown pension, often called pension drawdown or flexi-access drawdown, lets you keep your pension invested while taking money out of it as and when you need it. That is the key difference from an annuity, which converts your pot into a fixed, guaranteed income for life. With drawdown you can take money as a lump sum, as regular payments, or a mix of the two, and whatever you do not take stays invested with the potential to grow, though its value can also fall.
How pension drawdown works
You can normally access your pension from age 55, rising to 57 from April 2028, or earlier in limited cases such as ill health. To start, you ‘crystallise’ all or part of your pension, which simply means moving it into a drawdown arrangement so you can begin taking money from it.
At that point you can usually take up to 25% of the crystallised amount as a tax-free lump sum, up to the Lump Sum Allowance, which for most people is £268,275. Many people take this tax-free cash to clear debts or help family. Alternatively, you can crystallise your pension in stages over several years, taking tax-free cash and income gradually, which can be a more tax-efficient approach for some. The rest of your fund stays invested and you draw an income from it.
Pension drawdown and defined benefit pensions
If you have a defined benefit (final salary) pension, drawdown is not directly available, but you could in principle transfer out into a private pension to use flexi-access drawdown. This is a high-stakes decision. Defined benefit schemes carry valuable guarantees that are usually lost on transfer, so it is essential to take advice from a defined benefit transfer specialist, such as one of Reeves’ partner firms, before changing anything. For most people with a defined benefit pension, staying put is the right answer.
The benefits of pension drawdown
Drawdown appeals to many people for a few clear reasons:
- Flexibility: you decide how much to take and when, so you can adapt your income to your circumstances, for example drawing more now and less once other income begins.
- Control: your pension stays invested and you decide how, which keeps the potential for further growth in play.
- Passing on unused funds: unlike a typical annuity or defined benefit pension where income usually stops when you and your spouse die, any funds left in a drawdown pot can normally be passed to your beneficiaries.
Pension drawdown rules and tax
Pensions broadly follow an Exempt-Exempt-Taxed pattern: contributions receive tax relief, the fund grows free of Capital Gains Tax, and withdrawals beyond your tax-free entitlement are taxed as income at your marginal rate. That means large withdrawals in a single year can push you into a higher tax band, so timing matters.
The rules on how unused pension funds are treated on death are changing. From April 2027, most unused pension funds are expected to be included in your estate for Inheritance Tax purposes. This is a significant shift from the previous position, and it makes taking advice on drawdown and estate planning together more important than ever. Because this area is changing, it is worth confirming the current rules before making decisions.
The risks to weigh up
Drawdown offers freedom, but that freedom comes with responsibility, and it is not right for everyone:
- Your income is not guaranteed. Because the pot stays invested, a market fall, especially early in retirement, can significantly reduce its value.
- You could run out of money. Withdraw too much too soon and your savings may not last as long as you need them to.
- It needs ongoing management. Drawdown is not set-and-forget. It is also worth putting a Lasting Power of Attorney in place so someone can manage decisions for you if you are unable to later in life.
Is pension drawdown right for you?
Pension drawdown gives you flexibility and control that an annuity cannot, but it carries investment risk and the responsibility of making your money last. For many people the best retirement income strategy blends different approaches, and the right mix depends entirely on your circumstances. Because the decisions are complex and often hard to reverse, professional advice is genuinely valuable here.