What drawdown means

Flexi-access drawdown lets you keep your pension pot invested after you start taking money from it, rather than converting it all into a fixed income immediately. You can take a flexible income, ad hoc lump sums, or both, while the remainder stays invested with the potential to keep growing (and the risk of falling in value).

How the tax works

Usually, up to 25% of your pension can be taken tax-free (see our guide to the tax-free lump sum rule), with the remainder subject to Income Tax at your marginal rate as you draw it. Because large withdrawals in a single tax year can push you into a higher tax band, spreading withdrawals across tax years is often more efficient than taking large amounts at once.

The core risk: running out

Because your pot stays invested, its value can fall — and if you're also withdrawing from it, poor investment returns early in retirement can do lasting damage to how long the money lasts (sometimes called "sequence of returns risk"). There's no guarantee the money will last as long as you do, unlike an annuity.

Sustainable withdrawal rates

There's no single correct figure, but many advisers use rules of thumb in the region of 3–4% of the pot's value per year as a starting point for a "sustainable" long-term withdrawal rate, adjusted for your own circumstances, other income, and how the pot performs over time. This is a starting point for discussion, not a guarantee — actual sustainable rates depend on investment returns, how long the money needs to last, and how flexible you can be about spending less in a bad year.

Drawdown vs annuity

Drawdown offers flexibility and the potential for continued growth, but carries investment and longevity risk. An annuity offers certainty for life but no flexibility and no further growth. Many people use a mix — an annuity to cover essential expenses, with drawdown for discretionary spending and flexibility.

Key takeaways

  • Drawdown keeps your pension invested while you take an income or lump sums from it.
  • Usually up to 25% can be taken tax-free; the rest is taxed as income when withdrawn.
  • There's a real risk of running out of money, especially with poor early investment returns.
  • Many people combine drawdown with an annuity to balance flexibility and certainty.