Building a pension is only the first part of retirement planning. The next question is how that money should support you once you stop working, reduce your hours or gradually move into retirement.
Pension drawdown gives you flexibility over how and when you take money from a defined contribution pension. Rather than exchanging your pension for a guaranteed income, you can leave some or all of the remaining fund invested and make withdrawals when you need them.
That flexibility can be valuable, but it also means taking greater responsibility for how long your pension needs to last. Investment performance, tax, inflation and the amount you withdraw can all influence the income available later in retirement.
At DG Financial Services, we help clients look beyond the first withdrawal and build a retirement income strategy around their spending, other income, investments, tax position and long-term plans.
What is pension drawdown?
Pension drawdown, usually known as flexi-access drawdown, allows you to take money from a defined contribution pension while leaving the remaining fund invested.
You can normally choose how much income to take and when to take it. That could mean regular monthly withdrawals, occasional lump sums or changing your income as your circumstances develop.
Unlike an annuity, however, drawdown does not normally provide a guaranteed income for life. Your remaining pension continues to rise and fall with the investments it holds, while every withdrawal reduces the amount left to fund your future.
This makes drawdown more than simply a way of accessing your pension. It becomes part of your wider retirement income plan.
How does pension drawdown work?
When you move pension benefits into drawdown, you can normally take up to 25% tax free, subject to your available allowances. The remainder can stay invested and be withdrawn as taxable income when required.
For most people, the standard Lump Sum Allowance is £268,275. This generally limits the total amount of tax-free pension cash available across your pensions, although people with certain protections may have a different allowance.
You do not necessarily have to move your whole pension into drawdown at once. Phased drawdown allows you to access smaller parts of the pension over time, potentially taking some tax-free cash and leaving the rest invested until it is needed.
This can be useful when retirement happens gradually. You might, for example, use pension income to supplement part-time earnings before later adjusting withdrawals when the State Pension or another source of income begins.
How is pension drawdown taxed?
Apart from available tax-free cash, money withdrawn through pension drawdown is generally treated as taxable income.
That means your pension withdrawals are considered alongside other taxable income you receive during the same tax year, such as earnings, the State Pension, rental income or other pensions.
The size and timing of a withdrawal can therefore affect the amount of tax you pay. Taking a large amount in one tax year could push part of your income into a higher tax band, whereas spreading withdrawals over several years may produce a different result.
Tax should therefore be considered as part of the withdrawal strategy rather than after the money has already been taken.
This becomes particularly important once the State Pension starts. It is taxable income and therefore uses part of your available tax bands, even though it is normally paid without tax being deducted at source.
How much can you safely withdraw?
There is no single withdrawal rate that will be right for everyone.
How much you can sustainably take from a pension depends on the value of the fund, your spending requirements, other sources of income, investment performance, inflation and how long the money may need to last.
Your requirements may also change considerably throughout retirement.
Spending can be relatively high during the early years when travel, hobbies and other activities are a priority. It may then reduce for a period before potentially increasing again later because of health, support or care requirements.
A retirement income plan should therefore be able to adapt rather than assuming you will need exactly the same amount every year.
Cashflow modelling can be particularly helpful here. It allows different assumptions about spending, inflation, investment returns and longevity to be tested, giving you a clearer view of whether your proposed withdrawals appear sustainable.
Why investment risk matters
Your pension usually remains invested while it is in drawdown, so investment performance continues to matter throughout retirement.
One important consideration is sequence-of-returns risk. Poor investment performance early in retirement can be particularly damaging when money is also being withdrawn from the portfolio.
If investments fall significantly and you continue taking the same income, more of the fund may need to be sold to meet those withdrawals. This leaves less capital invested to benefit if markets subsequently recover.
It is therefore possible for two people with similar average investment returns to experience very different retirement outcomes simply because those returns occurred in a different order.
A suitable investment strategy needs to balance your requirement for income today with the possibility that your pension may need to support you for several decades.
Pension drawdown or an annuity?
Drawdown is not the only way to create retirement income.
An annuity usually exchanges part or all of a pension fund for a guaranteed income, potentially for the rest of your life. Different options can provide features such as increases over time, guarantee periods or continuing income for a spouse or partner.
The trade-off is flexibility.
Pension drawdown allows greater control over withdrawals and keeps the remaining fund invested, but future income is not guaranteed. An annuity provides greater certainty, but once purchased there is generally less flexibility over the capital used to buy it.
The decision does not always have to be one or the other. Some people may use guaranteed income to help cover essential expenditure while keeping another part of their pension invested through drawdown for discretionary spending and future flexibility.
The appropriate balance depends on your circumstances and the level of certainty you want from your retirement income.
Consider your other retirement income
Your pension should rarely be considered in isolation.
You may eventually receive income from several places, including the State Pension, workplace or private pensions, ISAs, savings, investments, property or continuing employment.
Each can be treated differently for tax purposes.
For example, ISA withdrawals are generally tax-free, whereas taxable pension withdrawals are added to your other taxable income. Using different assets together can sometimes help provide the income you need without relying entirely on one pension.
However, tax efficiency is only one part of the decision. You also need to consider access to emergency capital, investment risk, inheritance plans and how much flexibility you want to retain.
A coordinated retirement income strategy can help bring these different assets together rather than making withdrawal decisions one account at a time.
Drawdown can affect future contributions
If you intend to continue working or contributing to a pension, it is important to consider the Money Purchase Annual Allowance before taking flexible taxable income.
Flexibly accessing certain pension benefits can trigger the MPAA, which is £10,000 for the 2026/27 tax year. Once triggered, this can restrict the amount that can subsequently be paid into defined contribution pensions without potentially creating a tax charge.
Not every way of accessing a pension triggers the MPAA. It is therefore worth understanding the consequences before taking benefits, particularly if you expect pension contributions to continue.
Pensions and inheritance planning
Pensions can also form part of wider estate planning.
The rules are changing from 6 April 2027, when most unused pension funds and pension death benefits will be brought within an individual’s estate for Inheritance Tax purposes.
This means retirement income and inheritance planning are becoming increasingly connected. However, drawing additional pension income simply to reduce a potential future tax liability will not automatically be the right decision.
Your first priority remains ensuring that you have sufficient income and capital to support your own retirement.
Is pension drawdown right for you?
Pension drawdown can work well for people who value flexibility and are comfortable keeping part of their retirement savings invested.
It can allow income to change as your expenditure changes, help bridge the period between work and the State Pension, and give you more control over when taxable income is taken.
However, that flexibility comes with investment risk. Your pension could fall in value, withdrawals may become unsustainable, and there is no guarantee that the fund will provide the income you need throughout retirement.
The decision should therefore begin with your wider retirement plan rather than simply asking how much you can withdraw today.
How DG Financial Services can help
Taking control of your pension income means looking beyond the pension pot itself.
At DG Financial Services, we can help you consider how much income you need, where that income should come from and how pension drawdown could work alongside the State Pension, savings, investments and other assets.
We can also review your withdrawal strategy, investment approach, tax position and long-term cash flow so that decisions made today take account of the retirement you want to fund in the years ahead.
Need help planning your pension income?
Pension drawdown can provide valuable flexibility, but withdrawals, investment risk and taxation all need to work together.
Contact DG Financial Services to review your pension options and build a retirement income strategy around your circumstances, priorities and long-term objectives.
THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE. TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY CHANGE. A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55, RISING TO 57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE OR ANOTHER EXCEPTION APPLIES. THE VALUE OF INVESTMENTS AND ANY INCOME FROM THEM CAN GO UP OR DOWN. YOU MAY GET BACK LESS THAN YOU INVEST. PENSION DRAWDOWN INCOME IS NOT GUARANTEED, AND YOUR FUND COULD RUN OUT IF WITHDRAWALS ARE TOO HIGH, INVESTMENT PERFORMANCE IS POOR, OR YOU LIVE LONGER THAN EXPECTED. ACCESSING TAXABLE PENSION BENEFITS MAY TRIGGER THE MONEY PURCHASE ANNUAL ALLOWANCE AND RESTRICT FUTURE PENSION CONTRIBUTIONS.
