How pension drawdown works with multiple pensions or larger pensions

Pension drawdown is typically used by people who want a flexible retirement income and are comfortable keeping their pension invested rather than converting it into a guaranteed income.

It applies to pensions where you build up a pot of money, such as personal pensions and most workplace pensions. It doesn’t usually apply to defined benefit (final salary) pensions, which pay a secure income instead of providing a fund to draw from.

In practice, drawdown is often used alongside more secure income sources. For example, someone with a defined benefit pension, and later the State Pension covering their core bills, may use drawdown from a personal pension to provide additional income for travel, home improvements or unexpected costs.

Most people think about drawdown when they start taking money from their pensions. At that stage, it helps to look at how much income you need, what other pensions you have, your likely tax position and how comfortable you feel with investment risk, and then compare drawdown with options such as an annuity.

You don’t have to combine your pensions to use drawdown. Each pension can be moved into drawdown separately, which allows different pots to be used at different times.

For example, you might take income from one pension that’s invested more cautiously while leaving another invested for longer-term growth. This can help manage both tax and investment risk and may reduce the need to sell investments when markets are lower.

Consolidating pensions into a single plan can make drawdown easier to manage and may simplify investment and withdrawal decisions. In some cases, it can also reduce charges.

Some older pensions include valuable guarantees, protected benefits or different death benefit options that could be lost on transfer, and in some cases, exit charges may still apply.

Because of this, combining pensions is usually a financial planning decision rather than simply an administrative task.

Where you have several pensions, the timing and source of withdrawals can make a difference to how much tax you pay and how long your pension lasts.

This might involve moving pensions into drawdown gradually, taking tax-free cash in stages and using different pensions at different times. Some people use one pension to provide income up to their personal allowance and then use ISA withdrawals to top up their spending without moving into a higher tax band.

Many drawdown pensions allow part of the fund to be held in cash. Keeping a small cash reserve inside the pension can provide income during market downturns, reducing the need to sell investments when their value is lower.

The rules for larger pension funds have changed. The Lifetime Allowance (LTA) was abolished in April 2024, which means there is no longer a limit on how much a pension can grow. However, tax relief on contributions is still restricted by the annual allowance and your earnings, which for most people, is up to £60,000 per year, and up to 100% of their earnings. The allowance may be lower for very high earners.

Although the overall pension fund is no longer capped, the amount that can you can take tax-free is still limited. For most people, the maximum tax-free lump sum allowance is £268,275. Any money taken above this is taxed as income.

Because of this, the key issue with larger pensions is often how and when withdrawals are taken. Taking a large amount in one tax year could push more of the income into a higher tax band, spreading withdrawals over several tax years may mean more of your money is taxed at lower rates.

The order in which you use your pensions and other assets can affect both income tax and inheritance planning.

Pensions are currently usually outside your estate for Inheritance Tax (IHT) purposes, although from April 2027 unused pension funds will be included when calculating IHT. This means some people may review whether to take pension income earlier than they otherwise would.

For example, someone with significant ISA savings may choose to use those first to keep pension withdrawals within a lower tax band. Others may prioritise pension withdrawals because of the planned IHT changes. The most suitable approach depends on your wider financial position and long-term plans.

If you take taxable income from a drawdown pension, the Money Purchase Annual Allowance (MPAA) is triggered. This reduces the amount you can contribute to defined contribution pensions in the future to £10,000 a year.

Taking only tax-free cash does not trigger the MPAA, which can be relevant if you are still working or plan to continue contributing to a pension.

Because your pension remains invested, its value can fall as well as rise. Taking income when markets are lower can reduce how long your pension lasts. There is also a risk that withdrawals are set at a level that cannot be sustained throughout retirement, particularly if retirement lasts longer than expected.

A structured withdrawal plan and regular reviews with your financial planner can help manage these risks.

Having multiple pensions or a larger pension pot can increase the complexity of tax planning, investment decisions and withdrawal strategy. Financial advice can help assess whether consolidation is appropriate, plan a sustainable level of income and coordinate pensions with other assets and inheritance planning.

Before taking benefits, a financial planner can help you review and plan:

• the total value of your pensions
• how much income you need and when
• other sources of retirement income
• your expected tax position each year
• whether you plan to continue contributing to pensions
• your investment approach across different pots
• your beneficiary nominations and inheritance plans