Using drawdown

Drawdown
Advantages	Disadvantages
Flexibility about when and how much income you can take (from flexi-access drawdown schemes).	There is an element of risk - investments may fall and your pension fund could decrease, which could mean a significant decrease in future income or you could run out of money.
Flexibility to decide how much of your fund you want to invest where – whether that’s choosing a ‘low risk’ fund, a ‘higher risk’ fund that may provide a better return, or a mixture of both.	Fees will usually be charged for administration and investment management. The costs associated with these arrangements can be high.
On your death, up to age 75, the remaining drawdown fund can be returned to your beneficiaries as a tax free lump sum, or they can continue to receive the income tax-free through drawdown. If you die age 75 or above, the remaining drawdown fund can be returned to your beneficiaries as income or lump sum (though it will get added to their other incomes and taxed at their marginal rate).	Generally, smaller fund sizes are unlikely to survive a prolonged fall in investment performance.
You can still secure a guaranteed income later on in your retirement provided you still have the funds to do so.	The amount of income you would receive is not guaranteed; charges may apply when you take an income; or the rates used in converting your pension pot into a guaranteed income for life may change over time. So if you choose to buy a guaranteed income for life (through an annuity) at a later date then the amount of income you'll receive may be more or less than if you had bought an annuity earlier.
	If you take income from flexi-access drawdown (or withdraw more than the limit set by HM Revenue & Customs from a capped drawdown plan), you will trigger the Money Purchase Annual Allowance. This means that if you want to continue to contribute to a pension and your contributions (including those of your employer and the tax relief you receive) exceed £4,000 a year, you may incur an additional tax charge.

If you are considering this type of product it is important to get some guidance or advice about its suitability for your personal circumstances.

Your financial intermediary can provide advice but if you don't currently have one, you can find someone local to you at MoneyHelper. Alternatively every retiree is entitled to some free guidance from the UK government’s Pension Wise service from MoneyHelper.

Find out more...

How does drawdown work? +

First of all, you will need to transfer your pension savings to a pension scheme that operates drawdown, if your current scheme does not offer this. This could be a scheme that is operated by your current pension savings provider, or if they don’t offer income drawdown, you will need to transfer to another provider who does.

You will normally have the choice to take up to 25% of your pension pot as a tax-free lump sum.

You then move the rest into one or more funds that allow you to take a taxable income at times to suit you. The drawdown funds are invested in one or more funds with an aim of providing growth and to support income being taken. However the money invested can go down as well as up and so there are risks associated with this type of arrangement.

You can move your pension pot gradually into income drawdown. You can take up to a quarter of each amount you move from your pot tax-free and place the rest into income drawdown.

Is drawdown right for me? +

If you want to keep your options open and avoid being locked into an annuity then drawdown could be for you.

Income drawdown will also appeal to you if you’d like to have flexibility over the frequency and amount of income you take or actively manage your invested pension savings.

As your invested money can go up or down you need to have a healthy attitude to risk. If you want a risk free, guaranteed income for life that’s low maintenance then drawdown is not for you.

You will need a large fund if this is your only means of generating an income in retirement.

If you are interested in drawdown we recommend you seek financial advice.

How much income will income drawdown give me? +

Unlike a pension annuity, drawdown does not provide a guaranteed income for the rest of your life. When deciding how much to take, you could consider:

How much money you have saved in your pension pot
How often you take some income and of course how much – the more you take, the less there is for the future
How long you live
The investment performance of the chosen fund(s) and any other charges applied.

Tax relief on future pension savings +

If you put your pension pot money into a flexi-access drawdown scheme and start to take an income, or if you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap, you will trigger the Money Purchase Annual Allowance. This reduces the amount that can be contributed to money purchase pensions in any one tax year while still benefitting from tax relief.

Can I switch from drawdown to an annuity? +

Provided you have sufficient funds left in your drawdown account you can purchase an annuity at any time. Remember that annuity rates can go down as well as up, so delaying could cost you more.

What death benefits can be paid from drawdown funds? +

If you or your beneficiary die with funds remaining in your drawdown plan, your beneficiaries can take those as a lump sum, as flexi-access drawdown, or as an annuity.

If you or your beneficiary die before age 75, death benefits are usually paid tax-free.

If you or your beneficiary die ages 75 or over, death benefits are taxed at the beneficiary's marginal rate.

Can I run out of money? +

If you take too much income, live longer than you anticipated or if your investment does not perform as expected, then you could run out of money.

Whilst no one can be sure how long they will live, statisticians use information about you and statistical analysis to identify the probability of living longer. Why not use our longevity calculator to see the probability of how long you might live?

What tax will I pay? +

The first 25% you take of your pension is tax-free. Then any subsequent withdrawals you make in income drawdown are subject to income tax at your marginal rate.

If you have other income, you’ll need to plan carefully how much drawdown income to take as you may push yourself into a higher tax bracket. We recommend that any tax planning should be discussed with a financial adviser or tax expert beforehand.

If the value of all of your pension savings is above £1,073,100 when you access your pot (2022-23 tax year) further tax charges may apply.

Securing a guaranteed income