What is Pension Drawdown?
Pension drawdown (officially "flexi-access drawdown") allows you to keep your pension pot invested while drawing an income from it. Introduced under the 2015 pension freedoms, it replaced the more restrictive capped drawdown and gave retirees much greater flexibility over how and when they access their savings.
With drawdown, you can take up to 25% of your pension as a tax-free lump sum (subject to the £268,275 Lump Sum Allowance that replaced the old LTA-linked cap from 2024), then withdraw the remainder as taxable income at whatever rate suits you — paying income tax at your marginal rate. The remaining pot stays invested and continues to (potentially) grow.
Use our Drawdown Calculator to model how long your pot will last at different withdrawal rates and growth assumptions.
Key 2026 Developments Affecting Drawdown
Pension IHT from April 2027
The Autumn 2024 Budget announced pensions will be included in estates for IHT from April 2027. This removes a major incentive to hold pension wealth unspent and may change optimal drawdown strategy for those with large pension pots who were planning to pass them on.
Pension access age rising to 57 (April 2028)
If you are planning to use drawdown as part of an early retirement strategy, note that the minimum pension access age rises from 55 to 57 in April 2028. Plans for accessing drawdown between 55 and 57 after April 2028 will need revision.
Annuity rates remain attractive
Interest rates in 2026 remain significantly higher than the 2010–2022 period. This has made annuity rates more competitive — a £200,000 pot can secure approximately £12,000–£14,000/year for a 65-year-old. This makes a hybrid drawdown/annuity approach more attractive than it was in the low-rate era.
PLSA living standards updated (2025/26)
The moderate retirement standard has risen to £34,000/year for a single person. This requires approximately £22,000/year from private sources above the State Pension — meaning a pot of ~£550,000 at a 4% drawdown rate.
Drawdown vs Annuity in 2026
| Feature | Drawdown | Annuity (2026) |
|---|---|---|
| Income security | No guarantee | Guaranteed for life |
| Flexibility | Full control over withdrawals | Fixed once purchased — cannot change |
| Investment risk | Yes — pot can fall | None — provider bears it |
| Longevity risk | Yes — pot may run out | Protected — paid until death |
| Inheritance (from 2027) | Subject to IHT on death | Usually nothing after death |
| Inflation protection | Possible if pot grows | Only if index-linked (lower starting income) |
| Indicative rate (65yr) | Variable | ~6–7% for level single life |
The Key Risks in Pension Drawdown
Longevity Risk
You outlive your pot. A 65-year-old in 2026 has a 50% chance of living past 87 (ONS data). Plan for at least 25–30 years of drawdown — ideally 35 years to be conservative. A 3% withdrawal rate significantly improves the probability of pot survival over very long retirements.
Sequence of Returns Risk
Poor investment returns early in retirement can permanently damage a drawdown strategy, even if long-term returns are good. Withdrawing from a falling portfolio accelerates depletion. Holding 2–3 years of living costs in cash or short-dated bonds as a buffer reduces the need to sell equities at depressed prices.
Inflation Risk
Rising costs erode purchasing power over a long retirement. £30,000/year today needs to be roughly £54,000 in 25 years to maintain purchasing power at 2.5% annual inflation. Your pot needs to grow faster than inflation to maintain real income value — not guaranteed, particularly in adverse markets.
Behavioural Risk
The temptation to take too much too early — whether for a luxury purchase, gifts to family, or simply enjoying early retirement — is one of the most common drawdown mistakes. Once spent, investment returns cannot be recaptured. Discipline around withdrawal rates is as important as the rate itself.
Choosing a Sustainable Withdrawal Rate
Use our Drawdown Calculator to model different rates for your pot size. As a general guide:
Very high probability of lasting 40+ years. Best for early retirees (55–60), or those with no other income sources. Provides more inheritance potential.
The classic "4% rule". High probability of lasting 30 years in most scenarios. Most appropriate for those retiring around 65–67 with State Pension.
Higher immediate income but meaningful risk of depletion over a very long retirement. Best considered only with other income sources (State Pension, part-time work, annuity).
The Bucket Strategy: A Practical Drawdown Framework
The "bucket strategy" is one of the most widely used frameworks for managing pension drawdown risk. It divides your portfolio into time-based "buckets" with different investment strategies:
Bucket 1 — Cash (1–3 years of income)
Hold 1–3 years of living expenses in cash or cash-equivalent accounts. This means you never need to sell investments at a bad time to fund living costs. Earns minimal return but provides essential liquidity and psychological security.
Bucket 2 — Bonds/Mixed (3–10 years)
Medium-term assets including government bonds, corporate bonds, and balanced funds. Lower volatility than equities, generating income and moderate growth. Used to top up Bucket 1 when needed and provides a buffer against equity market volatility.
Bucket 3 — Equities (10+ years)
Long-term growth assets — global equity index funds, investment trusts, etc. These can withstand short-term volatility because they won't be needed for a decade or more. Over the long term, equities have historically provided the best protection against inflation and the highest total returns.
The bucket strategy is reviewed periodically — typically annually — to rebalance and refill Bucket 1 from Buckets 2 and 3 as needed. It is not a rigid system but a mental framework for managing the competing demands of short-term income security and long-term growth in retirement.
What Happens to Drawdown When You Die?
One of the most significant advantages of drawdown over an annuity has traditionally been the ability to pass on unused pension wealth. The rules are currently:
- If you die before age 75, beneficiaries can receive the remaining pot tax-free (as a lump sum or in drawdown)
- If you die at age 75 or over, beneficiaries pay income tax at their marginal rate on withdrawals from the inherited pot
- Pensions currently fall outside of your estate for IHT purposes — though this changes from April 2027
- You can nominate any person or charity as a beneficiary via your "Expression of Wishes" — pensions do not pass under your Will
From April 2027, unused pension pots will be included in estates for IHT. Depending on your total estate value, this could mean 40% IHT on pension wealth above the nil-rate band, potentially combined with income tax on beneficiary withdrawals. This makes estate planning around drawdown significantly more complex from 2027 — and professional advice more important than ever.
Ensure your Expression of Wishes is up to date with your current pension provider. While the pension trustee is not legally bound by it, they will typically follow it. Review this document whenever your family circumstances change (marriage, divorce, birth of children or grandchildren).