Pension drawdown explained

What drawdown is

Instead of exchanging your pension for a guaranteed income, you leave it invested and withdraw from it. You control how much you take and when. Whatever is left when you die passes to your beneficiaries.

That is the appeal, and it is genuine. It is also the risk: nobody is guaranteeing the money lasts. If markets fall and you keep withdrawing, or you simply live longer than the pot supports, you can run out.

Drawdown against an annuity

An annuity does the opposite. You hand a lump sum to an insurer and they guarantee an income for life. You lose access to the capital and, unless you buy the relevant options, you lose the ability to pass it on. In exchange the insurer carries the longevity and investment risk.

Neither is better in the abstract. The useful framing is how much of your essential spending is already covered by guaranteed income. If the state pension and any defined benefit pension already cover your basic costs, you can afford more variability on the rest. If they do not, guaranteeing a floor first has a lot to recommend it.

Many people end up with both: an annuity covering essentials and drawdown for the rest. That is often a more sensible answer than choosing one.

Sequencing risk

This is the concept that matters most in drawdown and the one least often explained.

The order of investment returns matters, not just the average. Two people can experience identical average returns over twenty years and end up in completely different places if one had poor years at the start. Withdrawing from a fallen portfolio means selling more units to get the same money, and those units are never there to recover.

The practical responses are to hold a cash buffer so you are not forced to sell into a fall, to be flexible about withdrawals in bad years, and to be more cautious about how much you take in the first few years than a simple average return would suggest.

How much can you take?

The commonly cited starting point is around 4% a year, increasing with inflation. Treat it as a sighting shot, not a plan. It derives from particular historical markets, assumes a particular time horizon, and takes no account of your circumstances.

In practice a sustainable rate depends on how long the money needs to last, how the portfolio is invested, whether you can flex spending downward in poor years, and what other income you have. Retiring at 58 is a very different problem from retiring at 68.

Tax, and the trap

Withdrawals above your tax-free entitlement are taxed as income in the year you take them. Taking a large amount in one tax year can push you into a higher band, or above £100,000 where the personal allowance starts to taper, when spreading it across two years would have cost less.

The trap: once you take taxable income flexibly from a pension, the money purchase annual allowance applies and your future contribution limit falls sharply. If you are still working or might work again, that is a serious consequence of what can feel like a small withdrawal.

Emergency tax codes on a first withdrawal are also common. It usually resolves, but be prepared for the first payment to be taxed more heavily than expected.

What happens on death

Money remaining in drawdown passes to your nominated beneficiaries. Where you die under 75 their withdrawals are generally free of income tax; at 75 or over they pay income tax at their own marginal rate.

From 6 April 2027 unused pension funds also count towards your estate for inheritance tax, which is a significant change from the position that made drawdown attractive as a way to pass wealth on. Our guide to inheritance tax on pensions from April 2027 covers it, and it is worth reading alongside this page if passing the pension on was part of your plan.

Whatever else you do, check your expression of wishes. Plenty of people have a nomination form that has not been looked at in fifteen years.

This page is general information about the rules and does not constitute advice.

Last reviewed: 17 September 2026. Next review: Annually.