How does phased pension drawdown work and is it tax efficient?

Full answer

Phased drawdown (also called phased retirement or phased crystallisation) is a strategy for accessing a defined contribution pension pot in a controlled, tax-efficient way rather than taking the whole pot at once. **How it works** Your pension pot starts as "uncrystallised" (not yet accessed). Each time you need income, you designate a portion -- a tranche -- into drawdown: 1. **25% of each tranche** is taken as a tax-free lump sum (Pension Commencement Lump Sum, or PCLS) 2. **75% of each tranche** enters the drawdown fund and is subject to income tax when withdrawn 3. The remaining uncrystallised funds stay invested, continue to grow, and are not yet subject to income tax **Why it is tax efficient** *Spreading income across tax years*: instead of triggering a large taxable income in one year (and potentially being taxed at 40-45%), you take income that fills your Personal Allowance and basic-rate band each year. *Multiple tax-free portions*: unlike taking the full 25% PCLS at once, phasing gives you 25% tax-free from each tranche -- effectively spreading your tax-free entitlement over many years while keeping money invested longer. *Example*: Pension pot £400,000 at retirement. - Option A (full crystallisation): take £100,000 tax-free now, invest £300,000 in drawdown; all future withdrawals taxable - Option B (phased): each year crystallise £40,000 -- £10,000 tax-free + draw £16,000 taxable. Taxable income = £28,570 (within basic-rate band if no other income). Remaining £360,000 still growing tax-deferred. **Comparison with UFPLS** An Uncrystallised Funds Pension Lump Sum (UFPLS) takes 25% tax-free and 75% taxable in one combined payment each time. Phased drawdown is more flexible because: - You choose how much to crystallise and how much to take as income separately - You can take the tax-free cash without immediately drawing the income **Sequencing risk** Phased drawdown keeps more funds invested for longer -- this increases the impact of poor early returns (sequencing risk). Managing investment allocation through the glidepath to retirement is important. **Death benefits** Uncrystallised funds remaining at death are generally free of IHT and can be passed to nominees (subject to changes proposed from April 2027 which may bring pensions into the IHT net -- seek current advice). Crystallised drawdown funds are also usually free of IHT under current rules. **Money Purchase Annual Allowance** Once you start taking taxable income from drawdown (not just the tax-free cash), the Money Purchase Annual Allowance (MPAA) of £10,000 applies to future contributions -- important if you plan to continue working and contributing.

Try the calculator

More answers

• How much can a self-employed person contribute to a pension in 2026/27?
• What is the maximum pension contribution including carry forward for 2026/27?