A drawdown pension lets you keep your pension pot invested and withdraw money from it as you need it, rather than buying an annuity upfront

With a drawdown pension (also called income drawdown), you stay the owner of your pension savings. The money remains invested, usually in funds you choose or that your provider manages. You then take withdrawals whenever you want — monthly, yearly, or in lump sums — and pay income tax on what you withdraw. The rest of your pot keeps growing (or shrinking, depending on investment performance). You keep doing this until you run out of money or decide to stop.

This is different from an annuity, where you hand over your entire pot to an insurance company in exchange for a may provide income for life. With drawdown, you keep control and flexibility, but you also carry the risk that your money runs out or that poor investment returns leave you with less than you expected.

Key Takeaways

  • Your pension pot stays invested and in your name; you withdraw what you need and pay tax on withdrawals only.
  • You can access your full pot from age 55 onwards (rising to 57 from April 2028), but taking large amounts early means less growth later.
  • Investment risk stays with you — if markets fall, your pot shrinks and your future income falls with it.
  • The government sets a "sustainable withdrawal rate" as guidance; withdrawing more than this rate may deplete your pot faster than intended.
  • You can switch to an annuity later if you want may provide income, but annuity rates may be worse if you are older or markets have moved.

How withdrawals and tax work

When you take money from a drawdown pension, it counts as income for tax purposes. Your first withdrawal each year is tax-free up to your personal allowance (£12,570 in the 2024–25 tax year, though this varies). Anything above that is taxed at your marginal rate — 20% basic rate, 40% higher rate, or 45% additional rate, depending on your total income that year.

Your pension provider will usually ask you how much you want to withdraw and when. Some providers let you set up regular monthly payments; others require you to request each withdrawal. The provider deducts tax before paying you, or you may need to pay tax through self-assessment if your total income is high. Keep records of all withdrawals, as you will need them for your tax return.

There is no requirement to take a minimum amount each year, and no maximum — you can take nothing one year and a large sum the next. This flexibility is one reason people choose drawdown, but it also means you have to plan carefully to avoid running out of money.

Investment risk and how your pot can change

Unlike an annuity (which guarantees a fixed income regardless of market performance), a drawdown pension rises and falls with the value of your investments. If stock markets fall, your pot shrinks. If you withdraw money during a downturn, you are selling investments at lower prices, which can damage your long-term growth.

Your provider will offer you a choice of investment funds — from cautious (mostly bonds and cash) to adventurous (mostly shares). The more cautious your choice, the lower the risk of big drops, but also the lower the expected growth. Many people gradually shift to more cautious investments as they age, to protect the pot they are drawing from.

This is why drawdown works best if you have a large enough pot that withdrawals are a small percentage of it each year. If your pot is small or you are withdrawing heavily, market downturns can seriously damage your retirement income.

The sustainable withdrawal rate and how much you can safely take

The Financial Conduct Authority (FCA) publishes guidance on a sustainable withdrawal rate — roughly how much you can withdraw each year without running out of money over a typical retirement. This rate changes based on market conditions and your investment choice. In recent years it has been around 3–4% of your pot per year for a cautious portfolio, and lower for more aggressive investments.

This is guidance, not a rule. You can withdraw more if you want, but doing so regularly will deplete your pot faster. Your pension provider should show you projections of how long your money will last at different withdrawal rates, based on their assumptions about investment returns and inflation. Read these carefully — they are estimates, not guarantees.

Many people use the sustainable rate as a starting point and adjust based on their actual spending needs and how their investments perform. If markets do well, you might increase withdrawals; if they do poorly, you might reduce them temporarily.

When you can access drawdown and age limits

You can start drawing from a pension pot from age 55 onwards (this is rising to 57 from April 2028). There is no upper age limit — you can keep drawing as long as you live and as long as money remains in the pot.

Your first withdrawal can include a tax-free lump sum of up to 25% of your total pension pot (this is a one-time right across all your pensions combined). The rest of any withdrawal is taxed as income. After you have taken your tax-free lump sum, all further withdrawals are taxed.

If you die before spending all your pot, the remaining money can usually pass to your beneficiaries. The tax treatment depends on your age when you die and whether you have already taken your tax-free lump sum — ask your provider for details.

Drawdown versus annuity: when each makes sense

An annuity gives you a may provide income for life in exchange for handing over your pot. Drawdown keeps you in control but leaves you exposed to investment risk and the possibility of running out of money. Neither is right for everyone.

Drawdown often suits people with a large pot (£100,000 or more), who want flexibility, who are comfortable with investment decisions, or who expect to live a shorter retirement. An annuity often suits people with a smaller pot, who want certainty and simplicity, who are uncomfortable with investment risk, or who want to pass money to beneficiaries (though annuity rates for this are usually poor).

You do not have to choose one or the other for your entire pot. Many people use drawdown for part of their pension and buy an annuity with another part, to balance flexibility with security. You can also switch from drawdown to an annuity later, though annuity rates may be worse if you are older or if markets have fallen.

Common pitfalls and what to watch for

One common mistake is withdrawing too much early. If you take large sums in your first few years of retirement and markets then fall, you may not have enough left to recover. This is called "sequence of returns risk" — the order in which returns happen matters as much as the average return.

Another pitfall is neglecting to review your investments. If you set up a drawdown pension and never look at it, your fund allocation may drift (for example, if shares outperform bonds, your pot becomes riskier than you intended). Review your investments at least annually and rebalance if needed.

A third mistake is underestimating how long you will live. Pension calculators often assume you live to 85 or 90, but many people live longer. If you are in good health, plan for a longer retirement than you think you will need.

Finally, do not ignore tax. If you have other income (work, rental income, savings interest), your pension withdrawals may push you into a higher tax band. Work with an accountant or tax adviser if your situation is complex.

Frequently Asked Questions

Can I take my whole pension pot out at once?

Yes, you can withdraw your entire pot whenever you want from age 55 onwards. The first 25% is tax-free; the rest is taxed as income at your marginal rate. However, taking it all at once may push you into a much higher tax band that year, and you lose the benefit of ongoing investment growth. Most people spread withdrawals over time.

What happens to my drawdown pension if I die?

If you die before age 75, your remaining pot usually passes to your beneficiaries tax-free. If you die at 75 or older, beneficiaries pay income tax on withdrawals they make from the pot. The exact rules depend on your provider and whether you have nominated beneficiaries — check your pension documents or ask your provider.

Can I change my mind and buy an annuity later?

Yes, you can switch from drawdown to an annuity at any time. However, annuity rates depend on your age and current market conditions. If you are older or if interest rates have fallen since you started drawdown, you may get a lower rate than you would have received earlier. Get quotes before you decide.

What if my pot runs out before I die?

If you exhaust your drawdown pension, you will need to rely on other income — state pension, savings, work, or support from family. This is why it is important to plan withdrawals carefully and review them regularly. If you are worried about running out, consider buying an annuity with part of your pot to may provide a baseline income.

Do I have to take withdrawals every year?

No. You can take nothing one year and a large amount the next. However, if you do not take anything for a long time, your pot may grow beyond what you need, or you may face a large tax bill if you eventually withdraw a big sum. Most people find a regular withdrawal pattern (monthly or yearly) easier to manage and plan around.