How does pension drawdown work?


How does pension drawdown work

Pension drawdown, or income drawdown, is a way of taking money from your pension to live on during retirement.

This way of using your pension lets you keep your savings invested when you retire and take money – ‘drawdown’ – from your pension funds.’

Because your money stays invested (usually in the stock market) there is a risk that your fund may fall in value. How your fund is protected depends on what type of pension you have. The upside is that investment growth can provide higher returns and your pot could continue to increase in value.

Am I eligible for drawdown?

You need to be over 55 and have a defined contribution pension to access your money in this way.

Is pension drawdown right for me?

Pension drawdown is worth considering if:

  • You want your money to continue to be invested
  • You want the flexibility to take lump sums out as and when you want
  • You want to take out different amounts each year
  • You want to manage your annual tax liability.

Pension drawdown might not be the best option if:

  • You want a guaranteed income each year
  • You’re worried that if you draw from your pension there may not be sufficient funds
  • You’re worried that if you draw from your pension there may not be sufficient funds left to fund the remainder of your retirement, which could be 30 years or more
  • You don’t want to face investment risk in retirement
  • You want to avoid high charges.

You’ll find more helpful information on this at Citizens Advice.

What’s the difference between pension drawdown and an annuity?

Buying an annuity means you use your pension savings to buy a guaranteed income to last for the rest of your life. Despite their poor reputation, annuities could still be the right option, especially if you don't feel comfortable with the investment risk of income drawdown. An annuity is a retirement income product that you buy with some or all of your pension pot and provides you with a regular income for life, or for a set period.

The government has changed the rules so that new types of annuities can share some of the benefits of flexi-access drawdown, such as being able to pass on your funds when you die or varying the amount of income you can take.

You can also use part of your pension savings to buy an annuity, while leaving the rest in income drawdown.

Find out about other ways you can use your pension pot.

How much can I draw down before I pay tax?

The first 25% you take of your pension is tax-free. Then any additional withdrawals you make in income drawdown are subject to income tax (2020/21 rates):

  • If you have no income from any other sources, the first £12,500 is tax-free.
  • You pay tax at 20% on the next £37,500.
  • You pay tax at 40% on everything above £50,000 (£12,500 + £37,500).
  • You pay tax at 45% on everything above £150,000.

Example: If you took out £50,000, and had no other income from private pensions and the state pension, you'd have a tax bill of £7,500 after taking your £12,500 tax-free allowance into account.

What is the difference between flexible and capped drawdown?

Capped drawdown was a way of taking money from your pension that was stopped in 2015,which means that unless you took your pension before that time, only a flexi-access drawdown is available to you.

If you are in a capped drawdown plan, you can keep it or convert to a new flexi-access drawdown.

The key steps to pension drawdown

If you decide that pension drawdown is the right option for you and your retirement plans, some steps that you might decide to take include:

  1. Move your pension into drawdown
  2. Take your tax-free cash lump sum
  3. Reinvest the rest to provide an income
  4. Monitor your investment

What else do I need to consider?

Money running out – if you take too much your retirement fund could run out and you’ll be left with no regular income.

Costs – charges and fees can vary greatly depending on the provider. These include set-up and admin fees as well as withdrawal charges.

Being alert to pension fraud

Pension fraud saw an increase after April 2015, when new rules allowed people to take some or all of their pension pot as a lump sum. If you would like to read more about how to be more alert to pension fraud the Government offers advice and information.

Considering financial advice

As with any big financial decision in life, you may think about getting financial advice from a financial expert. An Independent Financial Adviser could help you make informed decisions about your pension pot that could help keep you safe and make the most of your money.

You can get free and impartial advice from the Government service Pension Wise.

What’s next?

If you still have questions about pension drawdown, or have other pension related questions, you can read our pension FAQs.


The information on this page was sourced between June - October 2020. Information on this site does not constitute any form of advice, representation, or arrangement by us and you take full responsibility for making (or refraining from making) any specific investment or other decisions. You should take independent financial advice from an adviser who is registered by the Financial Conduct Authority.


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At Yorkshire Building Society we created Our Money Movement because we could see how most of the information for people approaching retirement was overly complex and full of jargon and hidden charges. Our aim is simple. To provide plain, straight talking guidance to help you make informed decisions about your financial future.