What is income drawdown?

Your options when you retire

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If you have a defined contribution pension, there are several things you can do with your pension pot when you reach retirement.

You can take up to ^{_corporation_tax} as a lump sum without paying tax. If you take out more than this you’ll have to pay income tax. You can choose to use the rest of your pension money to buy an annuity, a product that guarantees a certain income for the rest of your life (or for an agreed period).

Alternatively, you can move your money into income drawdown, which means your pension money remains invested, and you can take taxable income from it as and when you want. If you do this without taking the ^{_corporation_tax} tax-free lump sum first, you can get ^{_corporation_tax} of each withdrawal tax-free.

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How does income drawdown work?

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Income drawdown funds are usually invested in a combination of shares, cash and bonds, and you can withdraw money from the fund to keep you going during your retirement.

As of April 2015, all new income drawdown products are ‘flexi-access drawdown’, which means you can choose how much money to take from your pension each year. However, you will need to pay income tax on this pension money once you’ve taken the ^{_corporation_tax} tax-free amount and you’ve exceeded your personal tax-free allowance for the year.

What are the advantages and disadvantages of income drawdown?

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There are pros and cons to income drawdown. On the plus side, it’s a flexible way of taking a retirement income and if markets are buoyant, your pension pot could increase in value. Income drawdown can look like a particularly attractive option when annuity values are very low. Plus, if you die before 75, your beneficiaries can inherit the money in your pension drawdown product without paying tax, whereas most annuities can’t be passed on when you die.

The downsides include the possibility of your pension losing value if the investments perform poorly, and the fact that your pension money could run out if you withdraw too much or you live longer than you expect. In contrast, an annuity guarantees a fixed income, so it’s much more predictable. Bear in mind that if you choose income drawdown, you can later decide to use your remaining pension money to buy an annuity.

With PensionBee, you’ll be able to track how your funds are performing through our online dashboard. Once you reach your pension age (currently 55, rising to 57 in 2028) you can make a withdrawal. You’ll need to verify your identity using our Facial Similarity Check (FSC) process. If all your bank details and identity are successfully verified, it usually takes around 10 working days for you to receive your money. Taxable withdrawals can only be made once a month. This means you’ll need to plan your withdrawals carefully to stay within this limit.

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Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2025