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Pension drawdown – flexible income on your terms

How pension drawdown works

Pension drawdown is a flexible way to take income from your pension when you turn 55 (57 from 6 April 2028). It lets you to dip in and out of your pension savings as your needs evolve. 

You can usually take out up to 25% of your pension savings tax free, and the rest will stay invested. You decide how much income to take, and when. This could be a regular monthly amount, occasional lump sums, or a combination of both. You can also adjust your withdrawals over time.
 

Tax rules can change and the impact of taxation and any tax relief depends on your circumstances, including where you live.

Unlike an annuity which provides a guaranteed income, drawdown doesn’t offer any promises. Because your pensions remains invested, the value of your money can go down as well as up, and there’s a risk that your money could run out if withdrawals are too high, or markets don’t perform as expected.

Key benefits

  • Flexibility

You can stop, start, or change your income as you see fit, which could prove valuable if life throws you a curveball.

  • Growth potential

Because your pension stays invested, it has more opportunity to grow in a tax-efficient manner.

  • Investment choice

You’ll have complete control over how your pension’s invested. You can pick your own funds, choose a ready-made option, or have an adviser do this for you.

Risks and considerations

  • Investment risk

Your pension remains exposed to market fluctuations, meaning poor performance could reduce the value of your pot. You’ll need to carefully consider how your money’s invested. 

  • Longevity risk

There’s no guarantee your money will last throughout retirement. You’ll need to have a clear strategy and give it ongoing attention.

  • Complexity

Managing pension drawdown can be more complex than other options. It’s important to understand the implications of how and when you take an income. 

FAQs about pension drawdown

You can continue contributing to your pension, but once you withdraw any taxable income over the 25% tax-free amount, the Money Purchase Annual Allowance (MPAA) comes into effect. This limits your total contributions to defined contribution pensions to £10,000 per tax year – and exceeding that could result in tax charges.

Any remaining funds in your pension pot can usually be passed on to your beneficiaries. The way this is taxed depends on your age at the time of death. If you’re under 75, your beneficiaries can typically receive the money tax-free – either as a lump sum or as income.

If you’re 75 or older, the money will be taxed at the recipient’s marginal rate. You can nominate who you’d like to receive your pension, and it’s worth reviewing this regularly to make sure it reflects your wishes. 

Although pension drawdown offers flexibility, it also comes with responsibility. It’s not a one-size-fits-all solution, and it may not be suitable for everyone. It’s also worth noting that it could affect state benefits you may receive, so you should check this isn’t going to be a problem before going ahead. Find out more by visiting the MoneyHelper website. 

If you’re unsure how much you can safely withdraw, or how to invest your pension, financial advice can help you make informed decisions and avoid costly mistakes.

If you are approaching retirement with a Prudential Pension you can explore your options here.  We break down your investment choices and help you make an informed decision about what is right for you.

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Need help deciding?

Choosing how to access your pension is a significant decision, and you want to get things right. Speaking to one of our financial advisers can give you clarity and confidence that you’re on the right track. This includes helping you understand if pension drawdown is right for you. And if so, we can help devise a strategy that supports your goals and lifestyle needs.  

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