Pension Drawdown
About pension drawdowns
Pension drawdown lets you take an income from your pension while the rest stays invested. Since the 2015 pension freedoms introduced flexi-access drawdown, it has become the most popular way to access a defined contribution pension. You choose how much to withdraw and when. The money left in the pot can continue to grow, but it can also fall. Unlike an annuity, the income is not guaranteed to last.
In 2024/25, nearly 350,000 pension plans entered drawdown for the first time, a 25.5% increase on the year before, according to FCA retirement income data. What you take, when you take it, and how the rest is invested all affect how long your money lasts and how much tax you pay.
From April 2027, unused pension funds will be included in your estate for inheritance tax. If you've been leaving your pension untouched as a way to pass wealth on, the maths has changed. The order in which you draw from your pension, ISAs, and other assets now directly affects how much IHT your estate pays.
At Vintage Wealth Management, we manage drawdown portfolios, plan withdrawals to keep your tax position as efficient as possible, and make sure your drawdown strategy fits with the rest of your financial plan. That includes your investments, your estate, and your income in retirement
What is pension drawdown and how does it work?
Pension drawdown, sometimes referred to as income drawdown, lets you keep your pension invested while taking money out as income. It’s available from age 55, rising to 57 from April 2028, and there’s no upper age limit. Most defined contribution pensions now offer flexi-access drawdown, though some older schemes may require a transfer first.
When you move into drawdown, you can take up to 25% of your pot as a tax-free lump sum, up to a total of £268,275 across all your pensions. You do not have to take it all at once. Some people take the full amount upfront. Others take it gradually over time, crystallising portions of their pension in stages.
The remaining 75% stays invested. You draw from it when you choose, in whatever amount you need, and each withdrawal is taxed as income at your marginal rate. There’s no cap on how much you can take in any given year, but what you withdraw stops growing and the pot that remains can fall as well as rise.
How the portfolio is invested, how much you withdraw, and when you start all determine how long the money lasts. A poor sequence of investment returns in the early years of drawdown can reduce a pot far faster than the headline withdrawal rate would suggest.
How is pension drawdown taxed?
Income tax on drawdown withdrawals
The money purchase annual allowance
How to reduce tax on pension drawdown
How much tax you pay on pension drawdown depends on when you take the money, how much you take, and what other income you have in the same tax year.
The first 25% of your pension is usually tax-free. Everything you take beyond that is added to your other income for the year and taxed at your marginal rate.
The full new state pension is £12,548 a year in 2026/27. The personal allowance is frozen at £12,570. That leaves just £22 before income tax applies. If you're receiving the full state pension and you take any taxable income from drawdown, virtually all of it is taxed at 20% from the first pound. Take enough and you'll move into the higher rate at 40%.
HMRC almost always applies an emergency tax code to your first taxable drawdown withdrawal, treating it as though you'll receive that amount every month. You can reclaim the overpayment using form P55 if your pot is still open, or P53Z if you've withdrawn everything. It's a common issue and it means your first payment can come in significantly lower than you planned.
LOnce you take any taxable income from drawdown, the amount you can pay into pensions each year drops permanently from £60,000 to £10,000. This is the money purchase annual allowance, and it applies across all your defined contribution pensions.
It doesn't trigger if you only take your tax-free lump sum. But the moment you draw even £1 of taxable income, the reduced limit locks in permanently. If you're still working, still contributing, or planning to contribute again in the future, the timing of your first taxable withdrawal needs thinking through before you act.
There's no single way to avoid tax on pension drawdown, but the amount you pay is shaped by decisions you can control.
Spreading withdrawals across tax years keeps more of your income in lower tax bands. If you can delay taking drawdown until a year when your other income is lower, or take smaller amounts over a longer period, the cumulative saving can be substantial.
Phased drawdown is one way to do this. Instead of moving your entire pension into drawdown at once, you crystallise it in stages, taking a portion of your tax-free lump sum each time. This keeps the rest of your pot uncrystallised and outside the scope of the MPAA.
If you hold ISAs alongside your pension, the order you draw from each also affects your tax. ISA withdrawals aren't taxed, so drawing from your ISA first in years when your income is higher and your pension in years when it's lower can reduce your overall bill. From April 2027, that decision also affects your inheritance tax position, which we cover below.
Pension drawdown vs annuity
Drawdown and an annuity do different things. An annuity converts your pension into a guaranteed income for life. You hand over the pot and the insurer pays you a fixed amount until you die. Drawdown keeps your pot invested and lets you take what you need, but the income isn't guaranteed and the money can run out.
For most of the decade after the 2015 pension freedoms, annuity rates were so low that drawdown was the default. That's changed. A healthy 65 year old with £100,000 can now secure around £7,800 a year from a level single life annuity, close to the strongest rates since 2008. That makes annuities a realistic option again, particularly for covering fixed costs like housing and bills.
It doesn't have to be one or the other. An annuity can cover essential spending with a guaranteed floor. Drawdown can sit alongside it for flexibility, discretionary spending, and the ability to pass on whatever remains. The right split depends on the size of your pension, your other income, how long you need the money to last, and what you want to leave behind. At Vintage Wealth Management, we model both options against your numbers so you can see what each one gives you before you commit to either.
| Drawdown | Annuity | |
|---|---|---|
| Income | Flexible, not guaranteed | Fixed, guaranteed for life |
| Investment risk | Stays with you | Passes to the insurer |
| Access to your pot | Withdraw at any time | No access once purchased |
| Tax-free cash | 25% upfront or in stages | 25% taken before purchase |
| On death | Remaining pot passes to beneficiaries | Payments stop unless joint life or guarantee period selected |
| Inflation | Depends on investment returns | Only protected if you choose an escalating annuity |
| Indicative income (age 65, £100k pot) | Depends on withdrawals and investment performance | Around £7,800 a year (level, single life, June 2026) |
Pension drawdown and inheritance tax from April 2027
Under current rules, unused pension funds sit outside your estate for inheritance tax. If you die before 75, the remaining pot passes to your beneficiaries tax-free. After 75, they pay income tax at their marginal rate on what they withdraw, but there's no IHT charge on the pension itself.
From 6 April 2027, that changes. The Finance Act 2026 brings most unused pension funds and drawdown pots into your estate for IHT purposes. HMRC estimates the change will bring around 10,500 additional estates into IHT in the first year. The spousal exemption still applies, so anything passing to a surviving spouse or civil partner remains IHT-free. But for anyone leaving pension funds to children or other beneficiaries, the pot now sits alongside property, savings, and investments when your estate is valued.
This affects how you approach drawdown. Until April 2027, drawing from ISAs and other assets first and leaving your pension untouched is one of the most tax-efficient ways to pass wealth on. After April 2027, that pension pot counts towards your estate. If your estate is already close to the IHT threshold, an untouched pension could be what pushes it over.
Getting the withdrawal order right across your pension, ISAs, and other assets is exactly what we work through with you. For a full breakdown of thresholds and reliefs, see our guide to inheritance tax planning.
Why work with Vintage Wealth Management.
Why work with Vintage Wealth Management.
Drawdown doesn't sit in a silo. Your pensions, investments, tax position, estate, and protection all feed into it. We look at the full picture and build a plan you can act on.
Vintage Wealth Management has been advising on pensions and retirement income for over a decade. We're named in the FT Adviser UK Top 100 Financial Advisers every year since 2021, and our team includes Chartered Financial Planners and Fellows of the Personal Finance Society who specialise in retirement planning, tax-efficient withdrawal strategies, and investment management.
We've got offices in Central London, North West London, Portsmouth, Buckinghamshire, Swindon, and Dublin, and we work with clients across the UK.
Get in touch and we'll take it from there.
Frequently asked questions about pension drawdowns
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There's no legal limit. You can take as much as you want in any given year, or nothing at all. The question is how much you can take without running out. A widely used guideline is the 4% rule: take 4% of your pot in the first year and adjust for inflation after that. UK-specific research from Morningstar puts the sustainable starting rate closer to 3.9% over a 30 year retirement.
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No. The 25% tax-free entitlement applies to your total pot, not to each year's withdrawals. You can take it as a single lump sum when you enter drawdown, or in stages as you crystalise portions of your pension over time. Once you've used your full entitlement, up to a maximum of £268,275 across all your pensions, every further withdrawal is taxed as income.
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Under current rules, if you die before 75 the remaining pot passes to your beneficiaries tax-free. After 75, they pay income tax at their marginal rate on what they withdraw. From April 2027, unused pension funds will also be included in your estate for inheritance tax. The spousal exemption still applies. For more detail, see our guide to inheritance tax planning.
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There's no legal requirement unless you're transferring a defined benefit pension. But drawdown involves investment decisions, tax planning, and withdrawal strategies that affect how long your money lasts. Getting any of those wrong is difficult to undo. If you're unsure whether your current approach is right, a financial adviser can model your options against your actual numbers.
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You can start pension drawdown from age 55. From April 2028, the minimum age rises to 57. If you've already started taking money from your pension before April 2028, those payments can continue. If you're planning to access your pension in your mid-fifties, the change in minimum age needs building into your timeline.
Disclaimer
The information supplied is based upon our understanding of current UK law and HM Revenue and Customs (HMRC) practice. Tax law and HMRC practice may change from time to time. The value of any tax relief will depend on the individual circumstances of the investor. Your capital is at risk. The value of investments held in drawdown can fall as well as rise, and you could get back less than you invest. Past performance is not a reliable indicator of future results. Income from drawdown is not guaranteed and depends on investment performance and the level of withdrawals taken. A pension is a long-term investment not normally accessible until age 55 (rising to 57 from April 2028). There is a risk that your pension fund may be exhausted before the end of your retirement. The Financial Conduct Authority does not regulate tax planning. The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied, is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.