Pension drawdown: what is it and how can I plan effectively?

For people with personal pensions, drawdown has become the most common way of funding retirement. 

Figures published earlier in 2024 by the Financial Conduct Authority showed that in the 2022-23 financial year, almost 220,000 new drawdown arrangements were set up, compared with just 59,000 annuities – a type of insurance product that pays a guaranteed income for life and the main alternative to drawdown.

Pension drawdown, or flexible retirement income, refers to putting the money you’ve saved in your pension into a flexi-access drawdown fund, which you can withdraw from when you need to. The money left stays invested, with the goal of growing over time and providing ongoing income. 

Not all pension plans offer income drawdown, so you might need to transfer your pot into a personal pension such as a SIPP (self-employed personal pension) to get fully flexible access. 

Choosing what to do with your pension is a big decision, and there are risks with using pension drawdown. For example, if you take too much income out of your pot, too soon, you could run out of money.  

Equally, investments may not grow as quickly as hoped or could fall in value too, and it’s important to make sure you’ve got alternative plans in place. 

While this piece is designed to give a broad overview of drawdown, and some of the things to look out for, it should not be considered as pension advice and you should think about using an independent, regulated financial professional whenever making decisions about your pension.  

They can help you decide on your goals for your money, explain the pros and cons of potential decisions and help you manage and review the fund over time too. 

Why is drawdown popular? 

Drawdown started to become a more mainstream option with the introduction of the Pension Freedoms in 2015.  

In addition to offering savers the right to take cash out of their pension from the age of 55, it also relaxed the rules around drawdown, making it a much viable option for many retirees. 

Scott Gallacher, Chartered Financial Planner at independent financial adviser Rowley Turton, explains: “This reform removed income limits on withdrawals, allowing retirees unprecedented flexibility in managing their pension funds.”  

Under present rules, in most cases any remaining money in drawdown can be passed on to beneficiaries free of Inheritance Tax (IHT) when you die – increasing their popularity even further. 

 How much should I take out? 

The main risk with drawdown is that you run out of money at some point during your retirement, either because you’ve taken too much income too soon, or because the returns on your investments were less than expected.  

You do not have any guarantees, as you would with an annuity, meaning it’s important to plan ahead and work out whether drawdown fits with your retirement goals. 

“When it comes to drawing up a plan you almost need to work backwards, rather than starting with the size you want your pension to be,” says Reme Holland, Financial Planning Partner at chartered accountant Albert Goodman.  

“The first question to ask is: what income do I need and what income do I want in retirement?  

“These two are very different things. If you can start with these two numbers... you can work backwards and establish the capital sum you need, and then look at your existing plans and identify any shortfalls through a cash flow planning exercise.” 

If you’re unsure about whether your drawdown plans are suitable, working with a financial professional can help you look at the income you're likely to receive in retirement - from your various assets like pensions and other investments - in conjunction with your likely expenditure, to give you an idea of how long your pot may last. 

Your adviser will also be able to experiment with different stock market scenarios, to show you, for example, what would happen if returns were lower than you anticipated. 

“You should factor in lifestyle goals and expenditures, especially in the early years of retirement when you may be more active and inclined to travel or engage in other costly activities,” Gallacher adds. 

“Understand also that spending patterns can change significantly over time, typically decreasing in later years.” 

Given the risk of outliving your savings, another option is to buy an annuity with part of a pension fund to ensure a basic level of guaranteed income – in addition to any State Pension entitlement – to cover basic expenses, giving extra peace of mind and allowing freedom for the remainder of your pension.  

It’s also a good idea to have up to three years of expenses in cash savings. This can act as a buffer that enables you to temporarily pause withdrawals from your pension during periods when stock markets are falling.  

Maintaining income withdrawals at their existing rate during this time would put a drain on your pot and increase the speed at which it runs out. By stopping (or, at the very least, reducing) your withdrawals, you can minimise the pressure on your pension. 

Choosing a drawdown provider and your investment mix

Several investment companies and platforms offer drawdown services, says Holland. “Most modern pension schemes will enable flexible access drawdown. 

“You’ll need to check with your provider to make sure on the availability.”  

Holland adds if you’re transferring your pension, you should check you don't lose any of the benefits attached to your current plan – these can include things like guaranteed annuity rates, which could generate a higher level of return than annuities currently available on the open market. 

Also check to see if your provider charges any exit fees to move your pension, and if there are any charges for whichever platform you move to.  

It’s important to do your research on a new provider to make sure it offers all the things you need from your pension income, such a being able to invest as you wish and manage your money as easily as you need.

Holland adds: “When choosing a drawdown arrangement, it generally comes down to three points: charges, flexibility and investment performance.  

"With charges, the higher the cost, the harder your pension must work to generate returns. With flexibility, this comes down to your chosen route for access: for example, do you want to stagger your tax-free cash payment, or do you want it in one lump sum?  

“With regards to investment performance, some providers only give you access to their in-house funds.” 

Keeping your plans under review 

Whatever approach you take to drawdown, regular reviews of investment performance and your personal circumstances are crucial. “Significant market movements or economic changes may impact your investments and withdrawal strategy,” says Gallacher.  

“Meanwhile, changes in your personal life, such as health issues, living costs or significant life events like marriage or divorce should also prompt a review of your plan.” 

Holland adds: “Drawdown should be reviewed at least annually, and this should include looking at your level of income and asking whether it is still sustainable – or do you need to reduce your drawings? 

“As your health changes, you may wish to think about having a power of attorney in place to make sure your plans are looked after should something happen to you.”