Once you reach the normal minimum pension age, you’ll be able to withdraw up to 25% of your pension as a tax-free sum[@tax-rules]. With a drawdown pension, instead of buying an annuity, you can choose to invest what’s left and take a regular income from it.
The normal minimum pension age is 55, but will increase to 57 from 6 April 2028.
Depending on your investments, the value of your pension pot can go up or down. This means you may have a smaller income further on in retirement.
To set up a drawdown pension, you’ll either need to create an agreement with your pension provider or transfer to a new one.
Once your drawdown pension is set up, you’ll usually be able to withdraw 25% from your pension pot tax-free as a lump sum or as part of your regular income. Any money you withdraw from the other 75% will be subject to income tax.
You’ll then have to choose where to invest the remaining funds. You should choose investments that match your risk appetite.
Our retirement calculator can help you work out how much you’d need for annual expenses.
You can still pay into a drawdown pension, but there are two things to be aware of:
The recycling rule applies to all pension tax-free cash payments where payments into a pension are significantly increased on or around the time the tax-free sum is made.
The conditions to determine whether a recycling event has taken place can be complex and you should consider taking advice if you plan to significantly increase your payments around the same time as taking a tax-free sum.
If you continue to withdraw funds after taking out 25% tax-free, you’ll trigger the money purchase annual allowance (MPAA). This limits how much you can pay into your pension while still getting tax relief.
You can transfer a drawdown pension, but there are some rules:
It’s possible to transfer or consolidate other pensions into the same plan. However, the uncrystallised part (the savings element where nothing has been withdrawn) must be kept in a separate arrangement to the crystallised part (the drawdown element).
It's also possible to transfer a crystallised fund and this can be to an existing plan. It has to be to a separate arrangement within that existing plan, though.
When you set up a drawdown pension, you can nominate beneficiaries to receive the funds when you die.
If you die before 75, the funds in your pension pot will currently pass tax-free to your named beneficiaries. They can either receive these funds as a lump sum or as income. The money has to be ‘designated’ to your beneficiaries within 2 years of the pension administrator being notified of your death. After 2 years, the money may be subject to income tax.
If you die on or after your 75th birthday, your beneficiaries will have the lump sum or income taxed as earnings.
The Government has announced that for deaths from 6 April 2027, pension pots will no longer be exempt from inheritance tax. Inheritance tax may have to be paid on your pension pot if you die after this date.
To make sure your loved ones are supported once you die, read our retirement checklist and learn tips on how to make the most of your savings.
