When you retire, you’ll have a few decisions to make over how to take your income. Making the right one is important, because how you use your pension benefits can make a real difference over time.
You might want to buy an annuity, which offers a guaranteed income, or you might choose to withdraw lump sums directly from your pension. While these options have their benefits, they also have disadvantages: you could be overly exposed to inflation which could limit the continued growth of your savings and leave you short of income in retirement.
So, for many people, a more flexible approach works better.
Pension drawdown lets you keep your pension invested while taking an income from it over time, so you can cover your income needs while allowing your pension to continue growing.
This flexibility can be useful, but it also requires careful planning. An independent financial planner can help you structure withdrawals, manage risk, and keep your income on track throughout retirement.
Read on to find out how drawdown works and how you can benefit from it.
How drawdown works
Pension drawdown, sometimes called “flexi-access drawdown”, is a way of taking money from your defined contribution (DC) pension while leaving the rest of it invested.
It involves moving part of your pension into a drawdown account, which typically invests in a range of lower-risk or more diversified funds, and can even be held in cash for short-term access. You can take an income from this account whenever you need to, while the other part of your pension remains invested with the potential for continued growth. There are risks to this approach, though.
The key is that your retirement income isn’t fixed. You might take more in some years and less in others, depending on your spending needs and circumstances.
You can usually start moving money into drawdown from the Normal Minimum Pension Age (NMPA), which is currently 55 and set to rise to 57 from 2028.
Tax and withdrawal rules
How and when you take money from your pension can have a big impact on how much tax you end up paying.
In most cases, you can take up to 25% of your pension tax-free, up to the lump sum allowance of £268,275. The remaining 75% is treated as taxable income, so it’s added to the rest of your income for the year.
Because pension withdrawals above the tax-free portion are treated as income, taking large amounts in a single tax year can push you into higher Income Tax bands. However, spreading them over several years through drawdown can help keep your overall tax rate lower.
It can also help to blend your pension income alongside other tax-efficient sources, such as ISAs, to keep your overall tax bill as low as possible.
For example, Retirement Living Standards claims that for a couple to enjoy a moderate retirement in the UK, they currently collectively need around £44,000. This works out at just under £2,000 a month each.
If you were to take that £2,000 directly from your pension and had already used your tax-free portion, you could end up paying around £2,286 a year in Income Tax.
But if you blend a few different income sources and access your pension more flexibly through drawdown, you could potentially receive the same level of income without paying any tax.
That might include drawing from ISAs, using the tax-free element of your pension gradually, and making full use of your £12,570 Personal Allowance (2026/27).
One possible approach could look like this over a year:
| Income source | All from your pension | Mixed sources |
| Tax-free cash from your pension | £0 | £4,190 |
| Taxable pension income | £24,000 (£11,430 over the Personal Allowance) | £12,570 (£0 over the Personal Allowance) |
| ISA withdrawals | £0 | £7,240 |
| Total income | £24,000 | £24,000 |
| Tax paid | £2,286 | £0 |
Getting this balance right can make a significant difference over time, so it’s important to plan it carefully with an independent financial planner.
It’s also important to remember that tax treatment depends on individual circumstances and are subject to change.
Investment risk considerations
With drawdown, your pension stays invested, so its value can move up and down over time.
That can bring both benefits and risks. On the one hand, your investments have the chance to grow, which can help your pension keep pace with inflation. On the other, markets can fall, and if that happens while you’re also taking income, it can affect the value of your overall pot.
This is why how your pension is invested matters, and diversification is key.
A well-balanced portfolio is typically spread across different regions, sectors, and asset classes. It should also balance long-term growth with stability and include some lower-risk assets to help meet your short-term needs. This can help reduce the need to sell investments at the wrong time, especially during periods of market volatility.
An independent financial planner can help you put this structure in place and can keep it under review as markets move and your personal situation and income needs change over time.
An Amber River financial planner can help you make the most of your pension
When structured effectively, drawdown can be a flexible and sustainable way to fund your retirement. The key is making sure your withdrawals, investments, and tax planning all work together, rather than pulling in different directions.
An Amber River financial planner can help you:
- Work out a sustainable level of income each year depending on your circumstances and goals
- Structure withdrawals tax efficiently
- Make sure your investments are set up to support your income needs and retirement plans
- Review your plan regularly and adjust as your circumstances, life plan, or markets change.
Get in touch
To set up an initial appointment with an Amber River financial planner, call 0800 915 0000. Alternatively, you can use our contact form to arrange an appointment.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
