Glossary · UK
What is Income Drawdown?
A way of taking a flexible retirement income directly from an invested pension pot, rather than buying a guaranteed annuity, with the remaining fund staying invested.
Full Definition
Income drawdown (also called flexi-access drawdown) is a way of taking retirement income from a defined contribution pension pot while leaving the rest of the fund invested, rather than using it to buy a guaranteed annuity income. From age 55 (rising to 57 from April 2028), a member can normally take up to 25% of their pension pot tax-free (subject to the Lump Sum Allowance), and move some or all of the remaining fund into drawdown, from which they can then draw an income of whatever amount and frequency they choose -- including nothing at all in a given year -- with each withdrawal beyond the tax-free element taxed as income in the year it is taken. Because the remaining fund stays invested, its value can rise or fall with markets, meaning drawdown carries investment risk and the risk of running out of money if withdrawals are too high or investment returns are poor, unlike an annuity, which guarantees an income for life regardless of how long the person lives or how markets perform. Taking any taxable income from drawdown (beyond the tax-free lump sum) triggers the Money Purchase Annual Allowance, cutting the amount that can subsequently be paid into a defined contribution pension with tax relief from the standard annual allowance down to a much lower limit. Many retirees use a mix of approaches -- for example securing essential living costs with a small annuity or the State Pension, while using drawdown for discretionary spending -- to balance the certainty of a guaranteed income against the flexibility and growth potential of remaining invested.