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Pension drawdown, explained properly

Drawdown gives you control over a pension pot and hands you the risk at the same time. This page covers what it does, what it costs, and the traps that catch people.

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The short answer

Drawdown leaves your pension invested and lets you take money out when you choose. You can usually take 25% tax free, with the rest taxed as income. Nothing is guaranteed, and taking taxable income cuts what you can pay back in to £10,000 a year.

25%Usually tax free
£10,000Contribution limit once triggered
55Earliest age, 57 from 2028
No capOn how much you can withdraw
What is on this page
  1. What drawdown is
  2. How money comes out
  3. The tax trap nobody warns you about
  4. Taking money limits what you can put back in
  5. Sequence risk, in plain English
  6. What drawdown costs to run
  7. Drawdown or an annuity?
  8. Where people come unstuck
  9. Before you take anything

What drawdown is

Drawdown leaves your pension invested and lets you take money out as you need it. You choose how much and when. Nothing is guaranteed.

It replaced the old idea that everyone bought an annuity at 65. Since 2015 you have had a free choice over a defined contribution pot.

The pot stays exposed to markets. That is the point and the risk. Good years grow it while you draw. Bad years shrink it while you draw, which does more damage than most people expect.

How money comes out

You can usually take 25% of the pot tax free. The rest is taxed as income when you withdraw it. There are two normal ways to do it.

Flexi-access drawdown

The common route

You take your tax-free cash up front, then draw taxable income from the rest when you want it. The remaining pot stays invested.

Taking chunks

Sometimes called UFPLS

Each withdrawal is 25% tax free and 75% taxable. The rest of the pot stays untouched and invested. Useful if you want to spread the tax-free part.

The second route keeps more of your tax-free entitlement for later. That can matter a lot if you plan to stop work in stages.

The tax trap nobody warns you about

Your first withdrawal is usually taxed on an emergency code. HMRC treats one payment as if you will take the same amount every month. The tax deducted can be thousands more than you owe.

Take £20,000 as your first taxable withdrawal and the emergency code can treat it as £240,000 of annual income. You get the money back, but you have to claim it, and it can take weeks.

There is a simple fix. Take a small first withdrawal, let a correct tax code arrive, then take the larger amount. It costs nothing and avoids the problem.

Taking money limits what you can put back in

Once you take taxable income from a defined contribution pension, the money purchase annual allowance is triggered. Your yearly limit for new pension contributions drops to £10,000.

Before that, most people can pay in up to £60,000 a year with tax relief. Dropping to a tenth of that is a serious cut if you are still working.

Taking only tax-free cash does not trigger it. Taking taxable income does. This is the single most expensive mistake people make when they dip into a pension early while still employed.

Sequence risk, in plain English

Two people can average the same investment return and end up in very different places. What matters is the order the returns arrive in.

Falls early, recovers later Grows early, falls later
Starting pot £300,000 £300,000
Drawing £15,000 a year £15,000 a year
Average return over 20 years The same The same
Likely outcome Pot runs down far faster Pot lasts noticeably longer

An illustration of how drawing income during a fall locks in the loss. It is not a forecast and not advice.

A fall early on hurts because you sell units at a low price to fund income. Those units never recover. Holding one to two years of spending in cash is the usual defence.

An older woman painting at home

Thinking about taking money from a pension?

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What drawdown costs to run

Drawdown is not free. There are usually three layers of cost, and they compound over a long retirement.

Platform or provider chargeAn annual percentage of the pot, often tiered. Larger pots usually pay a lower rate. Some providers add a fee per withdrawal.
Investment chargeWhat the funds themselves cost. The gap between a cheap tracker and an active fund can be most of a percent a year.
Advice chargeAn initial fee to set it up and often an ongoing fee to review it. Ask for both in pounds, not just percentages.
Cash dragMoney held in cash for safety earns little. That is a real cost, and a reasonable one, but it should be a deliberate choice.

Drawdown or an annuity?

This is the real decision, and it is not either or. Plenty of people use both.

Drawdown Annuity
Income You choose, and can change it Fixed for life, set at the start
Runs out? Yes, if you draw too hard or markets fall No, it is paid until you die
Leaves money behind? Yes, the remaining pot can pass on Usually not, unless you add options
Needs managing? Yes, reviewed at least yearly No, it pays itself
Suits People with other income and some flexibility People who need a floor they cannot outlive

A common answer is to cover the bills with guaranteed income, then hold the rest in drawdown for everything else. Our annuities page covers the guaranteed side.

Where people come unstuck

  • Taking the full 25% tax free because it is there, then leaving it in a current account for years
  • Triggering the money purchase annual allowance while still paying into a workplace scheme
  • Setting an income level at 60 and never reviewing it
  • Holding the whole pot in one fund chosen a decade ago
  • Forgetting that the State Pension arrives later and changes the tax picture
  • Not telling the provider who should get the pot if they die

Before you take anything

1

Book a Pension Wise appointment

Free, government-backed and open to anyone over 50 with a defined contribution pension. Book it through MoneyHelper.

2

List every pot you have

Include old workplace schemes. If one is missing, use the tracing service.

3

Check for guarantees

Older policies sometimes carry guaranteed annuity rates worth far more than the pot. Never move one without checking.

4

Work out what you actually need

Start from your spending, not from what the pot allows. The two are rarely the same.

5

Get regulated advice before you commit

Taking money out is hard to reverse. A single conversation before is cheaper than a fix afterwards.

Two grandparents laughing together

Who this suits, and who it does not

Drawdown may suit you if
  • You have other guaranteed income covering the bills
  • You want to vary your income year to year
  • You want to leave what is left to someone
  • You can accept the pot falling in value some years
Think hard if
  • This pot is the only thing between you and the State Pension
  • A fall of 20% would stop you paying the mortgage or the rent
  • You do not want to review anything ever again
  • Your scheme has a guaranteed annuity rate attached

Check broadband before you make an offer

Broadband speeds can vary street by street, so check the exact address before you commit. Ofcom's free checker shows which broadband speeds and mobile coverage are available at any UK property.

Check broadband at an address (Ofcom)

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Questions people actually ask

When can I start drawdown?
Usually from age 55, rising to 57 on 6 April 2028. Some older schemes carry a protected earlier age. Check the scheme rules before you assume.
How much can I take out each year?
There is no legal cap. That is the freedom and the danger. A common starting point is 3% to 4% of the pot a year, reviewed regularly, but the right number depends on your other income and how long it has to last.
Will my drawdown pot run out?
It can. Nothing about drawdown is guaranteed. The risk rises if you draw hard, if markets fall early, or if you live longer than the plan assumed.
Does taking tax-free cash trigger the lower contribution limit?
No. Taking only your tax-free cash does not trigger the money purchase annual allowance. Taking taxable income does, and it cuts your yearly contribution limit to £10,000.
What happens to my drawdown pot when I die?
It can usually pass to whoever you nominate. If you die before 75 it is normally paid tax free. After 75 it is taxed as income on the person receiving it. From 6 April 2027 most unused pension funds will also count towards the estate for Inheritance Tax. Keep your nomination form up to date.
Why was my first withdrawal taxed so heavily?
Providers usually apply an emergency tax code to a first payment. HMRC treats it as if it repeats monthly. You reclaim the excess, but it is easier to take a small first payment and let the right code arrive.
Can I move my drawdown to a cheaper provider?
Usually yes. Charges vary a lot and the gap compounds over a long retirement. Check for exit fees and for any guarantees you would give up.
Should I use drawdown or buy an annuity?
Many people do both. Cover the bills you must pay with guaranteed income, then keep the rest flexible. The right split depends on your other income and how much variability you can live with.
How do I check broadband speed at a property?
Use Ofcom's free broadband and mobile checker at checker.ofcom.org.uk. Enter the property's postcode and choose the address to see which broadband speeds and mobile coverage are available before you make an offer.

Where to go next

Annuities explainedGuaranteed income for life, and what you give up.Tax-free cash explainedThe 25% rule and the £268,275 cap.When can I take my pension?Ages, rules and the April 2028 change.What happens to it when you die?Nominations, the age 75 line and tax.State Pension explainedThe floor everything else sits on.Combining old pensionsWhat we can help with if pots are scattered.
Where these figures come from

Figures checked on 1 September 2026 and correct for the 2026/27 tax year. Rates change, so check the source before you act on a number.

Pension advice goes to a separately authorised firm we have vetted. The introduction costs you nothing. If you go ahead, we may be paid a fee by that firm.

Last reviewed September 2026.

Get a second opinion before you draw anything

Money out of a pension is hard to put back. One conversation now is cheaper than unpicking it later.

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This goes to a separately authorised firm we have vetted. The introduction costs you nothing. If you go ahead, we may be paid a fee by that firm.

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