What is pension drawdown? How does it work, and is it the best way to organise your income in retirement? In this article, our financial planners at Elmfield demystify the notion of “drawdown”, how it compares to other options (e.g. buying an annuity) and ways it can be used to support a sustainable, comfortable lifestyle.
What is pension drawdown?
Briefly, pension drawdown is a method for generating an income from your pension pot(s). You withdraw some of the money to cover your monthly expenses, leaving the rest invested.
In 2025, the predominant form of this approach is called “flexi-access drawdown”. Here, you can take up to 25% from your pension pots after age 55 (up to £268,275 for most people) without it facing income tax. This is called your Pension Commencement Lump Sum (PCLS)
Pension drawdown only works if you have a pension “pot” to withdraw from. These are called “defined contribution” (DC) pensions and differ from final salary (defined benefit) pensions. The latter do not build up a pot of money, but offer a guaranteed retirement income.
In rare cases, someone with a DB pension might choose to transfer into a DC scheme – allowing them to use pension drawdown. However, this is a significant decision, and it is advisable to seek financial advice first. Transferring will not be in the interests of most individuals.
Tax considerations
The unique nature of DC pensions (and drawdown) can have a significant impact on your tax plan. The laws governing them are also changing. So, it pays to have an experienced adviser nearby who can keep their ear to the ground and guide you accordingly.
For instance, in the 2024 Autumn Statement, the government confirmed an upcoming change to DC pensions. From April 2027, unused pension funds are proposed to face inheritance tax (IHT) upon the owner’s death. Previously, these funds could be passed down IHT-free.
This change is prompting many to question their existing estate plan – e.g. “should I still rely on my pension to pass down my wealth to loved ones?” At the time of writing in 2025, you have time to seek advice and explore other options. For instance, you may wish to discuss the use of gifts and trusts with an adviser.
Is Pension Drawdown Right for You?
Pension drawn is not right for everyone. It can offer powerful retirement planning opportunities for many people, but you need to be sure it aligns with your goals, needs and wider strategy.
Drawdown can be a great option for those who place a high value on flexibility. If you want to vary your monthly retirement income, drawdown allows for this. For instance, during a market downturn, lowering your withdrawals can help preserve the lifespan of your pension funds.
If you have multiple income streams in retirement (e.g. State Pension, income from a rental property like a holiday let), you may be in a better position to absorb market fluctuations and adjust your drawdown withdrawals accordingly.
DC pensions (those “underpinning” drawdown) can also be more attractive for estate planning purposes despite the imminent change to IHT laws in 2027.
Drawdown may be less appealing, however, if you place high importance on financial security and stability in retirement. If this is the case, considering a guaranteed income from an annuity may better fit your financial circumstances
Invitation
Drawdown can be a powerful component of a wider retirement strategy and estate plan. Yet, it helps to seek professional advice to ensure you make decisions whilst equipped with the best possible information.
If you want to ensure you’re taking the right steps to safeguard your retirement and financial future, please get in touch. We’d love to discuss your goals with you!
Please note:
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. This content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.
