The withdrawal rate that decides how long a drawdown pension lasts

For most of the last century, a pension pot was turned into an income by buying an annuity. Since the pension freedoms of 2015, people with defined contribution pensions can instead leave the money invested and withdraw from it directly. This is flexi-access drawdown, usually just called drawdown. You decide how much to take and when, the rest stays invested, and whatever is left when you die can usually pass to the people you nominate.

The flip side is that nothing guarantees the money lasts. An annuity pays for life however long that is; a drawdown pot pays for as long as there is something in it. The single number that matters most is the withdrawal rate: how much you take each year as a share of the pot.

How drawdown works in practice

When you move a pension into drawdown, you can usually take up to 25% of it as a tax-free lump sum, subject to the overall maximum of £268,275. The rest stays invested in a drawdown account, and any withdrawal from that part is taxed as income through PAYE, alongside the State Pension and any other income. GOV.UK points out that taking a large amount in one year can push you into a higher tax band.

The pension rules let you start this from 55 at the earliest, unless you have a protected pension age. Under the Finance Act 2022 that minimum age rises to 57 from 6 April 2028, so anyone planning to start drawdown around that date should check which side of it they fall.

Why the withdrawal rate dominates

A pot that earns more than you take out can keep going indefinitely; a pot that pays out more than it earns will eventually run dry. The gap between the two decides how quickly. Because income usually needs to rise with prices, the effective gap widens a little every year.

Modelled figures, before income tax, with withdrawals taken at the start of each year. Real returns vary from year to year and can be negative; no return is guaranteed.

The difference between 4% and 6% looks modest on paper. In this example it is the difference between an income that is still going after thirty years and one that stops after eighteen. For someone starting at 66, that is the difference between age 96 and age 84.

The order of returns matters too

The table assumes the same return every year, which never happens. Real markets rise and fall, and the order in which good and bad years arrive matters a great deal in drawdown. A fall early in retirement, while you are also withdrawing, sells more units at low prices and leaves less to recover. The same average return with the bad years at the end does far less damage. This is often called sequence risk, and it is why many people keep one or two years’ planned withdrawals in cash, so they are not forced to sell after a fall.

Doing the sums

Two illustrative pots of £150,000, each paying £7,500 a year and each averaging 4% over the first three years. Pot A has returns of −15%, +12% and +15%; Pot B has +15%, +12% and −15%. After three years of withdrawals, Pot A is worth about £137,700 and Pot B about £142,500. Same average, same withdrawals, a gap of nearly £4,800 that came only from the order of the years.

The tax trap for people still saving

Taking taxable income from drawdown, even a small amount, triggers the Money Purchase Annual Allowance. From then on, the amount that can be paid into defined contribution pensions with tax relief, including employer contributions, falls to £10,000 a year. HMRC’s Pensions Tax Manual confirms the £10,000 figure from 2023/24 onwards. Taking only the tax-free lump sum does not trigger it, and nor does a small pot lump sum. Anyone still working and paying into a workplace pension should be clear about this before taking their first taxable withdrawal.

Charges and investment choices

A drawdown pot stays invested, so charges continue: a platform or administration fee, the funds’ ongoing charges and sometimes an adviser’s fee. Each one is taken from the pot every year and compounds in the same way returns do. Our explainer on what a fund’s yearly charge adds up to shows the effect over twenty years. Investment choices matter as well: a pot held largely in cash is less volatile but may struggle to keep up with withdrawals and prices.

Combining drawdown with other income

Drawdown rarely stands alone. The State Pension provides a base that rises each year. A final salary pension, if you have one, adds another guaranteed layer. Some people use part of their pot to buy an annuity that covers essential bills and keep the rest in drawdown for flexibility. Others use savings first, or think about the home, for example through downsizing or a lifetime mortgage. Planning the order in which different pots are used can make a real difference to tax and to how long the money lasts.

Who this matters for, and what to check

• Anyone with a defined contribution pension who is considering drawdown rather than, or alongside, an annuity.
• People who have already started drawdown and have not reviewed their withdrawal rate since.
• Anyone still paying into a pension, because of the £10,000 Money Purchase Annual Allowance.

Useful questions: what share of the pot am I taking this year? What happens to my plan if returns are poor for the first few years? How much of my essential spending is covered by guaranteed income? The free Pension Wise appointment from MoneyHelper, open to anyone 50 or over with a defined contribution pension, covers drawdown in detail.

The short version

Drawdown gives flexibility and keeps the money invested, but it puts the risk of running out on you. In the illustration, a 4% starting withdrawal rising with prices lasts about thirty years, while 6% lasts about eighteen. Sequence of returns, charges and tax all matter alongside the headline rate. Review the plan every year rather than setting it once.