You can spend decades building up a pension, but eventually the question changes. Instead of asking “How much should I be putting into my pension?”, you start asking:
“How do I turn the pension I’ve built into an income I can actually live on?”
For many people approaching retirement, pension drawdown can provide a flexible way to do this.
Pension drawdown allows you to take an income from a defined contribution pension while leaving some or all of the remaining money invested. You can choose how much to take and when, rather than having to turn your entire pension into a guaranteed income.
That flexibility can be valuable, particularly because retirement spending rarely stays exactly the same throughout your life.
But drawdown also comes with responsibility. Your pension remains invested, which means its value can rise and fall, and the income you take is not guaranteed in the same way as an annuity.
So, is pension drawdown right for you?
Read more to find out what a pension drawdown is, how it works and if it’s right for you. Find out more in our free guide available to download here.
What is pension drawdown?
Pension drawdown is a way of taking money from a defined contribution pension while keeping the remainder invested.
Rather than buying an annuity with your whole pension pot, you can leave money invested and take withdrawals from it as you need them.
You might choose to take a regular monthly income, for example, or take larger or smaller amounts at different times. You can also take lump sums as and when you need them, depending on how your pension is structured and the options offered by your provider.
You don't necessarily have to take all of your available tax-free cash either. You can usually take up to 25% of your pension as tax-free cash, subject to the relevant allowances, but you don't have to take the full amount immediately.
The important point is that the money you leave in drawdown remains invested.
That means there is still potential for your pension to grow, but it also means its value can fall.
Pension drawdown vs an annuity
One of the biggest decisions when planning retirement is how much flexibility you want compared with how much certainty you need.
An annuity typically provides a guaranteed income, usually for life, in exchange for some or all of your pension pot.
Drawdown works differently.
With drawdown, you retain more control over your pension and can generally change how much you take and when you take it. However, because your money remains invested, your retirement income is not guaranteed.
Neither approach is automatically right or wrong.
Some people place a high value on knowing that they will receive a set income, while others prefer the flexibility of keeping their pension invested and adjusting their income as their circumstances change.
There are also ways of combining different approaches, rather than seeing retirement income as an either/or decision.
Why might pension drawdown be useful in retirement?
One of the biggest advantages of drawdown is that it can reflect the way people actually spend money throughout retirement.
Your spending might not look the same at 60 as it does at 75 or 85.
Perhaps you want more income during the early years of retirement when you are travelling, enjoying hobbies, visiting family or simply making the most of having more free time.
Later, your spending may settle down.
You might also want to take a larger income initially and decrease it later when your State Pension begins.
Or perhaps you have other savings and investments that you can use alongside your pension, allowing you to vary where your income comes from over time.
This is one of the reasons retirement planning needs to look beyond a single pension pot.
Drawdown gives you flexibility, but flexibility comes with responsibility
Being able to choose how much you withdraw can be extremely useful, but it also means you need to think carefully about how much you can afford to take.
If you withdraw too much, particularly in the early years of retirement or when investments have fallen, you could reduce the amount available to provide an income later in life.
You also need to consider how long your money might need to last.
Retirement could last for several decades, and it is impossible to know exactly how long you will live or what your future spending needs will be.
Your investments, inflation, withdrawals and changing circumstances can all affect how long your pension lasts.
This is why pension drawdown isn't simply a case of choosing a percentage and taking it every year.
Your withdrawal strategy may need to change as your circumstances change.
How much income can you take from pension drawdown?
There isn't a single withdrawal rate that will be suitable for everyone.
You may come across calculations suggesting that you can safely take a certain percentage of your pension each year, but these are only starting points rather than guarantees.
Your circumstances matter.
For example, you might need to consider:
- How much income you actually need
- When your State Pension will begin
- Whether you have other pensions
- Your savings and investments
- Your mortgage and other debts
- How your spending might change throughout retirement
- How your pension is invested
- How long your money may need to last
- Your attitude towards investment risk
- Whether you want to leave money to your family
The important question isn't simply “How much can I take?”
It is “How much can I sustainably take while still giving myself the retirement I want?”
What happens to your pension when you start drawdown?
The money you don't withdraw remains invested.
This means it still has the potential to grow, but investment returns are not guaranteed and the value can go down as well as up.
This is particularly important once you are relying on your pension to provide an income.
When you were working, a fall in your pension investments might have given you time to recover before retirement. Once you start withdrawing money, market falls can have a greater impact because you are taking money from the pot while its value is lower.
This is one of the reasons your investment strategy should be considered alongside your retirement income plan, rather than treating the two as completely separate decisions.
Can you take pension income in different ways?
Yes. Pension drawdown doesn't necessarily mean setting up the same monthly payment for the rest of your life.
Depending on your circumstances and pension provider, you might take a regular income, occasional lump sums or a combination of the two.
You can also use phased or partial drawdown, gradually moving portions of your pension into drawdown rather than doing everything at once.
This can be useful if you want to take your pension gradually or if your income needs are likely to change over time.
For example, someone retiring at 62 might initially use their pension to supplement other income until their State Pension starts, rather than taking the same amount from their pension every year.
What about the 25% tax-free pension allowance?
This is an area that often causes confusion.
You can usually take up to 25% of your pension as tax-free cash, subject to the relevant allowances. For most people, the lump sum allowance is currently £268,275.
But you don't have to take the full 25% at once.
Taking a large tax-free lump sum simply because you can may not necessarily be the right decision. Once money has been taken out of your pension, it is no longer invested within the pension, and you need to think about what you actually intend to do with it.
For some people, taking tax-free cash gradually as part of a wider retirement income strategy may make more sense.
This is also completely separate from the Rule of 25, which is a retirement planning calculation based on the 4% withdrawal rule. The two should not be confused.
What other income could you use alongside drawdown?
Your pension is unlikely to be the only source of money available to you in retirement.
A retirement income plan might include a combination of:
- State Pension
- Workplace and personal pensions
- Pension drawdown
- ISAs
- Savings and investments
- Property income
- Part-time work
- Other sources of income
The way these different sources are used can make a significant difference to how your retirement finances work.
For example, you might use savings for larger one-off expenses, draw from an ISA for flexibility and use your pension alongside your State Pension for regular income.
There isn't necessarily one correct order for everyone. The right approach depends on your circumstances, tax position, objectives and the way you want your retirement to work.
Flexibility or certainty? Is drawdown right for you?
There is no single retirement income solution that is right for everyone.
Some people value the certainty of knowing exactly how much income they will receive. Others prefer the flexibility of being able to change their income, keep their money invested and retain control over their pension.
Drawdown can be particularly useful if you:
- Want flexibility over how much income you take
- Have other sources of retirement income
- Expect your spending to change over time
- Want to leave some pension wealth invested
- Want to retain the potential for your pension to grow
- Have other assets such as ISAs or savings that can work alongside your pension
But flexibility also means responsibility.
You need to think about how much you can sustainably withdraw, how your investments are structured, what happens when markets fall and how your income might need to change over time.
Retirement planning is about more than your pension
Perhaps the biggest mistake is thinking about your pension in isolation. A pension is one part of your wider financial picture.
The question isn't simply how big your pension pot is. It's how all of your resources work together to support the life you want to live.
You might have a £500,000 pension, for example, but what matters is how that money interacts with your State Pension, savings, investments, property, spending requirements and other plans.
And your version of retirement might look completely different from someone else's.
One person may want to travel extensively for the first ten years of retirement. Another may want to reduce their working hours gradually. Someone else may want to help their children financially or leave money for the next generation.
Your retirement income needs to reflect your life, not simply a calculation based on your pension value.
The question isn't whether drawdown is "good" or "bad"
It's whether it fits your circumstances and the retirement you want. Pension drawdown can provide valuable flexibility, but it isn't a guaranteed income and it needs careful planning.
Before accessing your pension, it is worth looking at the bigger picture: what you have, what you need, when different sources of income will begin, how your spending might change and how your pension can support you over the long term. Because retirement isn't just about making your pension last. It's about making your money work alongside the life you want to live.
Download our free pension drawdown guide to help you understand your options. This helpful guide is good for those approaching retirement, or already thinking about how you'll turn your pension savings into an income, we've created a free guide to pension drawdown to help you understand your options.
This guide looks at the key questions to consider, from how much income you might need and managing investment risk to tax, different income sources and what happens to your pension over time.
Download our free guides here: https://www.willowtree-fs.co.uk/resources
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At Willow Tree Financial Services, we offer personalised advice on Financial Planning, Mortgages, Investments, Pensions, Personal & Business Protection, and Wills, Trusts & Estate Planning, all tailored to your individual goals and circumstances.
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