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Retirement
Understanding pension drawdown
Taking control of your pension income means considering the tax consequences
Pension drawdown enables you to take money from a defined
contribution pension while keeping the rest invested. Rather than
receiving a fixed income, you decide how much to withdraw and when, giving
you flexibility to adjust your income as your circumstances change.
T
here are several ways to access a
England, Wales and Northern Ireland, depending on
defined contribution pension. You could
your taxable income.
take your tax-free lump sum and leave
the rest invested in drawdown, take
Different ways to access your pension
smaller withdrawals as needed or use part of your
Drawdown is just one option. Flexi-access drawdown
pension to buy an annuity that provides a guaranteed
allows you to take taxable income while keeping the
income. You could also take your entire pension as
remaining pension invested. Annuities can convert
cash, although this can create a significant tax bill and
some or all of your pension into a guaranteed income,
leave you without a long-term retirement income.
usually for life.
You can also take uncrystallised funds pension
How does drawdown work?
lump sums (UFPLS), with each withdrawal typically
You can normally access a private pension from age
comprising 25% of the fund, which is paid tax-free (if
55, although the normal minimum pension age is
it is within the individual’s Lump Sum Allowance), and
due to rise to 57 from 6 April 2028, subject to certain
75% taxable income. Taking your entire pension as a
exceptions. Once eligible, you can usually move some
lump sum is another option, but the taxable portion
or all of your pension into flexi-access drawdown and
could push you into a higher Income Tax band.
take income as needed.
For example, someone might take 25% of their
The standard annual pension allowance is
£60,000, though this can be reduced for some
higher earners. Understanding these rules is
particularly important if you plan to take pension
benefits while still working. t
Get advice
before withdrawing
Choosing how and when to access your pension can have long-term consequences. The
right approach will depend on your income
needs, tax position, investment strategy,
health, other assets and how long you expect
your money to last.
If you are considering pension drawdown
and would like to understand the tax implications or compare the ways to access your
pension, please get in touch.
This article does not constitute tax, legal or
financial advice and should not be relied upon as
Why timing matters
such. For guidance, seek professional advice. A
pension as tax-free cash, leave the remaining 75%
Taking a large withdrawal in a single tax year could
invested, and then withdraw a regular monthly income.
increase your Income Tax bill by pushing more of your
accessible until age 55 (57 from April 2028, unless
Alternatively, they could take occasional lump sums
income into a higher tax band. Spreading withdrawals
the plan has a protected pension age). The value of
when larger expenses arise. This flexibility can be
across tax years may therefore be more tax-efficient,
your investments (and any income from them) can
useful, but withdrawals need to be managed carefully
depending on your circumstances.
to avoid the pension running out prematurely.
It is also important to consider other income,
pension is a long-term investment not normally
go down as well as up, which would affect the level
of pension benefits available. Investments can fall as
including salary, the State Pension, investment income
well as rise in value, and you may receive back less
What tax will you pay?
and rental income. These can all affect your overall tax
than you invest.
You can usually take up to 25% of your pension as
position and the amount of pension income you can
tax-free cash, subject to the relevant allowances.
take without moving into a higher tax band.
The standard lump sum allowance for 2026/27 is
£268,275, although some people may have a higher
Watch the contribution rules
protected allowance.
If you continue contributing to a defined contribution
The remainder of your drawdown withdrawals are
pension after accessing any defined contribution
generally taxable as income and are added to your
pension flexibly, the Money Purchase Annual
other taxable income for the year. For 2026/27, the
Allowance (MPAA) applies. For 2026/27, the MPAA
standard Personal Allowance is £12,570, and Income
is £10,000, which may limit the amount you can
Tax is generally charged at 20%, 40% or 45% in
contribute efficiently.
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