Pension Drawdown Explained: Income, Tax and Risks (2026/27)

Pension drawdown lets you leave your pension pot invested and take money out of it as and when you need it, rather than handing it to an insurer in exchange for a fixed income. It is one of the two main ways to turn a defined contribution (money purchase) pension into retirement income in the UK, and for many people it has become the default choice since the 2015 pension freedoms. This guide explains how it works, exactly how the tax is applied, the real risks involved, and how drawdown stacks up against buying an annuity.

What is pension drawdown?

Drawdown - more precisely flexi-access drawdown - is an arrangement where your pension savings stay invested in funds (shares, bonds and so on) while you draw an income or take occasional lump sums. You stay in control of the pot, you can change how much you take, and anything left over remains invested and can be passed on. Crucially, your pot is not guaranteed: its value rises and falls with the markets, and it can run out if you take too much or investments perform poorly.

You can normally only access a workplace or personal pension from the minimum pension age of 55. This is rising to 57 from 6 April 2028, so anyone born after 5 April 1973 will generally have to wait until 57. The State Pension is completely separate and is paid from State Pension age regardless of what you do with a private pension.

How flexi-access drawdown works step by step

• You “crystallise” some or all of your pension - in other words, you decide to start taking benefits from it.
• You can take up to 25% of the amount crystallised as a tax-free lump sum (often called the pension commencement lump sum, or PCLS).
• The remaining 75% moves into a drawdown “pot”, stays invested, and is taxed as income when you withdraw it.
• You choose when and how much to take from that drawdown pot - a regular monthly income, occasional withdrawals, or nothing at all in a given year.

You do not have to crystallise everything at once. Many people “phase” their drawdown, crystallising slices of the pot over several years so they can take tax-free cash gradually and keep more invested.

The tax: the 25% tax-free element vs the 75% taxed as income

This is the single most important thing to understand about pension drawdown tax. Each pound you take out is made up of two parts:

• 25% tax-free. A quarter of what you crystallise can be taken with no tax at all (subject to the overall lump sum allowance, currently £268,275 for most people).
• 75% taxable as income. The rest is added to your other taxable income for the year and taxed at your marginal rate - the same Income Tax bands that apply to wages or a salary.

For 2026/27 (England, Wales and Northern Ireland) the bands are: a tax-free Personal Allowance of £12,570, then 20% basic rate on the next £37,700 of taxable income (up to £50,270 of total income), 40% higher rate from £50,270 to £125,140, and 45% additional rate above £125,140. Scotland has its own bands and rates. The Personal Allowance is reduced by £1 for every £2 of income above £100,000.

Because the taxable 75% stacks on top of any State Pension, earnings or other income you receive, taking a large chunk in one year can easily push you into a higher tax band - a trap we return to under common mistakes.

Emergency tax on your first withdrawal

The first time you take a taxable income payment from drawdown, your pension provider usually has no up-to-date tax code from HMRC, so they apply an emergency “month 1” tax code. This treats your one-off withdrawal as if you will receive the same amount every month for a year, so it often over-taxes you heavily - sometimes by thousands of pounds. The good news is that you can reclaim the overpayment: HMRC will usually correct it automatically over time, or you can claim it back straight away using forms P55, P53Z or P50Z depending on your circumstances. Knowing this in advance stops the first payment being an unpleasant shock.

Use the Pension Drawdown Calculator to model how long a pot might last at different withdrawal rates, and the Annuity Calculator to compare the guaranteed income an annuity could buy with the same money.

Worked example: a £200,000 pot and a £30,000 withdrawal

Suppose Priya, aged 60, has a £200,000 defined contribution pension and no other income yet (she has not started her State Pension). She decides to crystallise the whole pot and take £30,000 out in 2026/27.

• She crystallises £200,000, taking £50,000 as tax-free cash (25%). The remaining £150,000 stays invested in drawdown.
• She then withdraws £30,000 of taxable income from the drawdown pot.
• Her Personal Allowance of £12,570 covers the first slice tax-free.
• The remaining £17,430 falls in the basic-rate band and is taxed at 20% = £3,486 tax.
• So from £30,000 of taxable income she keeps £26,514. Add her £50,000 tax-free cash and she has received £76,514 in the year, with £120,000 (the rest of the taxable pot) still invested.

Now contrast that with taking the same £30,000 in a year when she also receives, say, £40,000 of salary. Her total income would be £70,000, the top £19,730 of it taxed at 40% - far more tax on exactly the same withdrawal. Timing matters enormously. (Note: the first £30,000 payment would also likely suffer emergency tax initially, to be reclaimed later.)

The risks: sequencing, investment risk and running out

Drawdown keeps your money invested, which means you keep the upside - but you also carry all the risk. The big ones are:

• Investment risk. If markets fall, your pot falls with them. There is no guarantee, unlike an annuity.
• Sequencing risk. Poor returns early in retirement, while you are also withdrawing, can permanently damage a pot. Selling units when prices are low to fund income means there are fewer units left to recover when markets rise. Two retirees with identical average returns can end up in very different places purely because of the order in which good and bad years arrive.
• Longevity risk. You might live longer than your money. There is no insurance built in - if you draw too much, the pot can simply run out, leaving you reliant on the State Pension alone.
• Inflation risk. A fixed pound withdrawal buys less each year. Your income strategy needs to allow for rising prices.

This is why advisers often talk about a “sustainable withdrawal rate” (historically a figure around 3–4% of the pot a year is cited as a rough guide, though it is not a guarantee). The right rate depends on your age, health, other income and how much risk you can stomach.

The Money Purchase Annual Allowance (MPAA)

Here is a rule that catches many people out. Normally you can pay up to £60,000 a year into pensions and get tax relief (the Annual Allowance). But once you take taxable income from a flexi-access drawdown pot, you trigger the Money Purchase Annual Allowance (MPAA). From that point on, the most you can contribute to defined contribution pensions with tax relief drops to just £10,000 a year.

Key points about the MPAA:

• It is triggered by taking taxable drawdown income - not by taking your 25% tax-free cash on its own.
• It is permanent once triggered and cannot be undone.
• It matters most if you are still working or plan to keep paying into a pension. Dipping into your pot at, say, 55 while still employed could quietly slash how much you can save tax-efficiently for the rest of your career.

If you might keep contributing, think carefully before taking that first taxable payment.

Drawdown vs annuity

The classic retirement decision is drawdown vs annuity. An annuity is an insurance product: you hand over a lump sum and, in return, receive a guaranteed income for life (or a fixed term). It removes investment and longevity risk - but you generally give up flexibility and access to the capital. Neither is automatically “better”; they suit different needs, and many people use a blend of both.

Both an annuity and drawdown still let you take your 25% tax-free cash first; the choice is about what to do with the remaining 75%. You do not have to decide all at once - you can use drawdown in early retirement and buy an annuity later, when annuity rates are often higher because you are older.

Common mistakes to avoid

• Taking too much, too soon. Big early withdrawals plus poor early returns (sequencing risk) can drain a pot far faster than people expect.
• Triggering a higher tax band. Stacking a large taxable withdrawal on top of other income can push part of it into 40% (or 45%) tax. Spreading withdrawals across tax years often keeps more in the 20% band.
• Being caught out by emergency tax. Expect the first taxable payment to be over-taxed, and know how to reclaim it (P55 / P53Z / P50Z).
• Accidentally triggering the MPAA. Taking taxable income while still wanting to contribute meaningfully can cut your future pension saving to £10,000 a year for good.
• Ignoring inflation. A level income that felt comfortable at 60 may feel tight at 80.
• Forgetting it is not advice-free. Drawdown shifts complex, lifelong decisions onto you. Free, impartial guidance from Pension Wise (a MoneyHelper service) is available to over-50s and is well worth booking before you act.

To go deeper, see our beginner’s guide to how pensions work, our explainer on the 25% pension tax-free lump sum, and the rest of our pensions guides.

FAQs

How does pension drawdown work in simple terms?

You leave your pension pot invested, take up to 25% as tax-free cash, and withdraw the rest as income when you need it. Those income withdrawals are taxed like earnings, and the pot can grow or shrink with the markets.

Is pension drawdown income taxed?

Yes. The 25% tax-free element aside, every taxable withdrawal is added to your other income for the year and taxed at your marginal Income Tax rate - 20%, 40% or 45% in England, Wales and Northern Ireland (Scotland has its own bands).

What is the MPAA and when is it triggered?

The Money Purchase Annual Allowance caps how much you can pay into defined contribution pensions with tax relief at £10,000 a year. It is triggered the first time you take taxable income from flexi-access drawdown - not by taking tax-free cash alone - and it is permanent.

Can I run out of money in drawdown?

Yes. Unlike an annuity, drawdown offers no guarantee. If you withdraw too much or investments perform badly - especially early on - the pot can be exhausted, leaving you dependent on the State Pension.

Drawdown or annuity - which is better?

Neither is universally better. Drawdown gives flexibility and growth potential but carries risk; an annuity gives a guaranteed lifelong income but less flexibility. Many people use both, or move from drawdown to an annuity as they get older.

Sources

• gov.uk - Pension types and options
• MoneyHelper - Income drawdown
• Pension Wise (MoneyHelper) - free guidance for over-50s

This guide is general information, not personal financial advice. For your own circumstances, speak to a qualified adviser or Pension Wise.

Drawdown isn't the only way to fund retirement from your assets - some homeowners top up their income with equity release against the value of their property.