Pension Guide: Pension Drawdown UK 2025/26 — How Flexi-Access Drawdown Works, Drawdown vs Annuity and What to Watch Out For

Flexi-access drawdown allows you to move some or all of your defined contribution pension pot into a drawdown fund while keeping it invested. You can then take income from that fund whenever you choose — monthly, annually, or as one-off lump sums. There is no cap on how much you can withdraw in any given year, which is why it is called 'flexi-access'.

Before entering drawdown, you can take up to 25% of your pension pot as a tax-free lump sum, known as the pension commencement lump sum. For the 2025/26 tax year, the maximum tax-free lump sum across all your pensions is £268,275 (unless you hold a protected allowance from the old lifetime allowance regime). The remaining 75% stays invested in your drawdown fund, and withdrawals from this portion are taxed as income at your marginal rate.

You can access your pension from age 55 under current HMRC rules (gov.uk/personal-pensions-your-rights/when-you-can-take-money), though this is set to rise to 57 from 6 April 2028. Most SIPP providers, workplace pension schemes and personal pension providers offer drawdown as standard. You do not need to move your entire pension into drawdown at once — you can crystallise your pot in stages, which is a useful tax planning strategy known as phased drawdown. For example, you might crystallise £40,000 per year, taking £10,000 as a tax-free lump sum and drawing income from the remaining £30,000.

It is worth noting that drawdown is only available for defined contribution pensions. If you have a defined benefit (final salary or career average) pension, you would need to transfer it to a defined contribution scheme first — a decision that requires regulated financial advice for pots worth £30,000 or more.

Understanding the tax treatment of drawdown withdrawals is essential, because poor planning can push you into a higher tax band unnecessarily. Drawdown income is added to your other taxable income for the year — including the state pension, any employment earnings, rental income and savings interest — and taxed at your marginal rate.

For the 2025/26 tax year (England, Wales and Northern Ireland), the income tax bands are:

The Personal Allowance for 2025/26 remains at £12,570, meaning the first £12,570 of your total annual income is tax-free. This is reduced by £1 for every £2 of income above £100,000, disappearing entirely at £125,140. If your only income in retirement is from drawdown and the state pension, careful planning of withdrawal amounts can keep you within the basic rate band.

The new state pension in 2025/26 is £2 — check your forecast at GOV.UK (gov.uk/check-state-pension)30.25 per week, or £11,973 per year. That leaves just £597 of Personal Allowance before any drawdown income starts being taxed. This means even modest drawdown withdrawals will attract at least basic rate tax. To stay within the basic rate band entirely, your total drawdown income would need to remain below approximately £38,297 (£50,270 minus £11,973).

One important trap to watch: when you first take a drawdown payment, your provider may apply an emergency tax code, which can result in significantly more tax being deducted than you actually owe. You can reclaim overpaid tax from HMRC using forms P55 or P50Z, but it is better to ensure your provider has your correct tax code before your first withdrawal.

Once you take any taxable income from a flexi-access drawdown fund — even £1 — you trigger the Money Purchase Annual Allowance (MPAA). This reduces the amount you can contribute to defined contribution pensions from the standard £60,000 annual allowance down to just £10,000 per year.

The MPAA is designed to prevent people from recycling pension withdrawals back into pensions to claim tax relief twice. But it catches many people who are not trying to game the system. For example, if you take a small drawdown payment at 55 while still working, your future pension contributions are permanently capped at £10,000 per year for defined contribution schemes.

Crucially, taking your 25% tax-free, as confirmed by HMRC (gov.uk/tax-on-your-private-pension/pension-tax-relief) lump sum alone does not trigger the MPAA. Nor does taking income from an annuity or a defined benefit pension. It is specifically triggered by taking taxable income from a flexi-access drawdown fund or from an uncrystallised funds pension lump sum (UFPLS) where the taxable portion is received.

If you are still building your pension and earning a salary, think carefully before entering drawdown. You may be better off using other savings (such as ISAs) to bridge a gap before fully retiring, rather than triggering the MPAA prematurely. For more on how pension tax relief works during the accumulation phase, see our pension tax relief guide.

The drawdown-versus-annuity decision is not binary — many retirees use both. But understanding the trade-offs is critical for making an informed choice.

Pension drawdown keeps your money invested, giving you flexibility over income amounts, potential for growth, and the ability to pass unused funds to beneficiaries. The downside is investment risk (your pot can fall in value), longevity risk (you could outlive your money), and the need for ongoing engagement with investment decisions.

An annuity converts your pension pot into a secure income for life. You hand over your capital to an insurance company and they pay you a fixed (or inflation-linked) income until you die. The certainty is the main advantage — you cannot outlive an annuity. The disadvantage is that you lose access to your capital, the income is typically lower than early drawdown rates, and most annuities die with you (unless you pay extra for a joint-life or guarantee period).

Annuity rates have been historically attractive in recent years. Record annuity sales of £7.4 billion were reported in 2024, driven by higher gilt yields making annuity pricing more favourable. A 65-year-old with a £100,000 pot could expect approximately £6,800–£7,200 per year from a standard single-life level annuity in early 2026, though rates vary by provider, health and features selected.

A practical approach for many retirees is to use an annuity to cover essential fixed costs (bills, food, council tax) and keep the remainder in drawdown for discretionary spending and legacy planning. This 'floor and upside' strategy provides both security and flexibility. For more context on the annuity market, see our analysis of record pension annuity sales.

Pension drawdown is not set-and-forget. There are several risks that every drawdown investor needs to manage actively.

Sequencing risk is the biggest danger in early retirement. If markets fall sharply in the first few years of drawdown while you are making withdrawals, the combination of losses and withdrawals can permanently deplete your pot — even if markets later recover. A £300,000 pot withdrawing £15,000 per year that suffers a 30% market fall in year one may never recover, whereas the same pot without the fall could last 25+ years. The standard guidance is to keep 1–3 years of income needs in cash or near-cash within your drawdown fund to avoid selling investments at a loss.

Sustainable withdrawal rates are hotly debated, but the widely cited '4% rule' (originally based on US data) suggests withdrawing 4% of your initial pot value, adjusted for inflation each year. In a UK context with current gilt yields and expected returns, many advisers suggest 3.5% as a more conservative starting point. On a £250,000 drawdown pot, that would be £8,750 per year — likely needing to be supplemented by the state pension or other income.

Inheritance tax changes from April 2027 are a major shift. The government announced in the Autumn Budget 2024 that unused pension funds passed on death will be brought within the scope of inheritance tax. Currently, pensions sit outside your estate for IHT purposes, making drawdown an efficient way to pass wealth to the next generation. From April 2027, this advantage will be significantly reduced. If your pension pot is part of your estate planning, take advice on whether accelerating drawdown withdrawals or purchasing an annuity might be more tax-efficient.

Platform and fund charges erode your pot over time. Typical drawdown platform charges range from 0.15% to 0.45% per year, plus underlying fund charges of 0.10% to 0.80%. On a £300,000 pot, total charges of 0.60% amount to £1,800 per year — money that is not compounding for your benefit. Compare providers and consider low-cost index funds to minimise this drag. Our SIPP guide covers how to choose a provider with competitive drawdown charges.

This article is for informational purposes only and does not constitute regulated financial advice. Pension rules and tax relief are subject to change. For personalised advice on your pension arrangements, consult a qualified financial adviser.