Pension Drawdown Calculator
Projected Pot Value Over Time
Projections assume steady growth. Real returns vary. This is not financial advice.
What Is Pension Drawdown (Flexi-Access Drawdown)?
Pension drawdown, officially called flexi-access drawdown, is a way of taking money from your pension while keeping the rest of your pot invested. It is one of the main options available since the Pension Freedoms of 2015, which gave people far greater flexibility over how they access their retirement savings.
In drawdown, your pension fund remains invested in a range of assets — typically stocks, bonds, property, and cash. You can withdraw as much or as little as you like, whenever you want (subject to tax). The key difference from an annuity is that your income is not guaranteed: if markets fall or you withdraw too much, you could run out of money. Conversely, if your investments perform well, your pot could grow even while you are drawing from it.
Drawdown vs Annuity: Which Is Right for You?
| Feature | Flexi-Access Drawdown | Annuity |
|---|---|---|
| Income flexibility | Complete flexibility | Fixed once set up |
| Investment risk | Yes — pot can fall | None (guaranteed) |
| Inflation protection | Can be built in via growth | Optional (escalating) |
| Death benefits | Pot passes to beneficiaries | Usually ends on death |
| Longevity risk | Pot can run out | No risk — income for life |
| Ongoing management | Requires regular review | None once purchased |
The 4% Safe Withdrawal Rule
The 4% rule originated from US research (the Trinity Study) suggesting that withdrawing 4% of your portfolio in year one, then adjusting for inflation each subsequent year, gives a high probability of the pot lasting 30 years. For a £300,000 pension pot, this means withdrawing £12,000 in year one (£1,000/month), then increasing slightly each year with inflation.
UK Context: Many UK financial planners suggest a slightly more conservative rate of 3–3.5% given UK market conditions and potentially longer retirement periods. At 3.5%, a £300,000 pot would sustain £10,500/year in today's money.
The withdrawal rate is calculated as your annual withdrawal divided by your starting pot. Below 4% is generally considered sustainable. Between 4–5% carries moderate risk. Above 5% significantly increases the chance of the pot running out, particularly if markets perform poorly in the early years of retirement.
Sequence of Returns Risk: The Hidden Danger
One of the most important but least understood risks in drawdown is sequence of returns risk. This describes the danger that poor investment returns early in your retirement can permanently damage your pot, even if average long-term returns are good.
Here is why it matters. Consider two people both with a £200,000 pot withdrawing £10,000/year. Person A experiences poor returns in years 1–5, then good returns. Person B experiences good returns first, then poor. Even with identical average returns, Person A can end up with significantly less money — or even run out entirely — while Person B flourishes. This is because selling investments at low prices to fund withdrawals means fewer units available to recover when markets rise.
Strategies to mitigate sequence of returns risk include:
- Cash buffer: Keep 1–2 years of withdrawals in cash so you never have to sell falling investments.
- Bucket strategy: Divide your portfolio into short-term (cash), medium-term (bonds), and long-term (equities) buckets.
- Flexible withdrawals: Reduce withdrawals in down years if circumstances allow.
- Partial annuity: Secure a guaranteed income floor via a smaller annuity to cover essential costs.
Tax on Drawdown Withdrawals
After you have taken your 25% tax-free pension commencement lump sum, all withdrawals from your drawdown fund are taxed as earned income at your marginal rate. In 2025/26, the tax bands are:
- £0–£12,570: Tax-free (Personal Allowance)
- £12,571–£50,270: 20% (Basic Rate)
- £50,271–£125,140: 40% (Higher Rate)
- Above £125,140: 45% (Additional Rate)
Important: your State Pension also counts as income. If you receive the full new State Pension of £11,502/year (2025/26), you have used most of your Personal Allowance. Each pound of drawdown income on top of this is immediately taxed at 20%.
Tax Planning Tip: Try to keep total income in retirement below £50,270 to avoid the higher rate. This may mean adjusting withdrawal amounts in different tax years, especially if you have other income sources.
The Money Purchase Annual Allowance (MPAA)
Once you start taking income from a flexi-access drawdown fund, the Money Purchase Annual Allowance (MPAA) is triggered. This reduces your annual pension contribution allowance from £60,000 to just £10,000 per year. This is significant if you plan to continue working and contributing to a pension while in drawdown.
Note that simply taking your tax-free cash lump sum does not trigger the MPAA if you do not take any drawdown income at the same time. Taking an uncrystallised funds pension lump sum (UFPLS) does trigger the MPAA.
Annual Review and Investment Pathway
In 2021, the FCA introduced a requirement for pension providers to offer investment pathways for drawdown customers who do not take regulated advice. These are four standard investment options based on what you intend to do with your drawdown money over the next five years:
- No plans to touch the money within 5 years
- Plan to use money to set up a guaranteed income (annuity) within 5 years
- Plan to start taking regular income from the fund within 5 years
- Plan to take out the money as a lump sum within 5 years
Regardless of which pathway or fund you use, you should review your drawdown arrangement at least annually, assessing whether your withdrawal rate remains sustainable, whether your investment mix is still appropriate, and whether your circumstances have changed.
Death Benefits in Drawdown
One major advantage of drawdown over an annuity is the death benefit. If you die while in drawdown, your remaining pension pot can be passed to your nominated beneficiaries:
- Death before age 75: Beneficiaries can take the entire pot free of income tax, either as a lump sum or continuing in their own drawdown arrangement.
- Death aged 75 or over: Beneficiaries pay income tax at their marginal rate on withdrawals from the inherited pot.
Drawdown pots are generally outside your estate for Inheritance Tax purposes (though pension reform proposals in 2027 may change this), making them a useful estate planning tool.
Regulated Advice Requirements
If you have a defined benefit (final salary) pension worth more than £30,000 and want to transfer it to a defined contribution arrangement in order to enter drawdown, you are legally required to take regulated financial advice from a qualified adviser. This is designed to protect those considering giving up valuable guaranteed income.
For defined contribution pensions, advice is not legally required, though it is strongly recommended given the complexity and long-term consequences of drawdown decisions.
Frequently Asked Questions
What is pension drawdown and how does it work?
Pension drawdown keeps your pension invested while allowing you to withdraw money as needed. When you enter flexi-access drawdown, you can take up to 25% of your crystallised fund as a tax-free lump sum, with the rest remaining invested. You can then withdraw income at any time, in any amount, with the withdrawals taxed as income. Your remaining pot continues to grow or fall with investment performance.
How much can I withdraw from my pension each year in drawdown?
There is no legal limit on how much you can withdraw annually from a flexi-access drawdown fund. You could take it all at once if you wanted. However, the amount you withdraw determines how long your pot lasts and how much tax you pay. Taking too much too soon risks depleting your pot before the end of your retirement. Taking a sustainable amount around 3–4% of your pot per year gives the best chance of the money lasting 25–30+ years.
Can I put money back into my pension while in drawdown?
Yes, but once you trigger the Money Purchase Annual Allowance (MPAA) by taking income from a drawdown fund, you can only contribute £10,000 per year to money purchase pensions (rather than the standard £60,000 annual allowance). This limit applies even if your employer wants to contribute more. If you are still working while in drawdown, plan carefully around this limit.
What is the difference between drawdown and UFPLS?
An Uncrystallised Fund Pension Lump Sum (UFPLS) is an alternative to drawdown where you take lump sums directly from your uncrystallised pension pot. With each UFPLS payment, 25% is tax-free and 75% is taxed as income. Unlike drawdown, you do not separate the tax-free and taxable portions upfront. UFPLS triggers the MPAA and uses up your Lump Sum Allowance with each payment.
What is a default investment pathway in pension drawdown?
Since February 2021, pension providers must offer investment pathways for non-advised drawdown customers. These are four ready-made investment options based on what you plan to do with your money over the next five years. They are designed to ensure that people entering drawdown have their money invested in something appropriate rather than sitting in cash. You can override the pathway and choose your own investments if you prefer.
Should I choose drawdown or an annuity?
The right choice depends on your personal circumstances. An annuity provides certainty of income for life and suits those who value security and do not want to manage investments. Drawdown suits those who are comfortable with investment risk, want flexibility, wish to preserve a pot for beneficiaries, or plan to manage their income tax carefully in retirement. Many people use a combination: an annuity to cover essential living costs, with drawdown providing flexibility on top.