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A simple guide to pension drawdown rules

Andy Stevens / 04 March 2020

The rules governing how much money you can withdraw from your pension pot underwent a radical shake-up back in April 2015. So what is drawdown and how could it affect you?

An emptying pension pot to represent drawdown

These changes to pension rules made it is much easier for people who reach retirement to leave their pension funds invested in the stock market, rather than being forced to buy an annuity.

While annuities offer a guaranteed income for the rest of the holder’s life, leaving pension cash invested in shares and other assets means it can continue to grow after you have stopped working.

What is drawdown?

Drawdown is the process of getting your hands on the money you've saved into your private pension pot, ie, the 'drawing down' of funds.

When are you eligible for the drawdown option on your pension?

The pension rules changed back on 6 April, 2015. You have to be 55 or above - and with a private pension - to qualify.

How do the pension drawdown rules affect you?

Under the drawdown rules, you can take all of your pension pot as a lump sum.

What is income drawdown?

The clue is in the name. By choosing to access your pension via income drawdown, you can take an income for yourself from your pension, while leaving the remainder in investments, usually on the stock market.

There are two different types of income drawdown you may have heard of, explained here:

What is flexible drawdown?

Flexible drawdown gives you, well, flexibility to take out as much money as you wish from your pension pot.

You'll receive the first 25% you withdraw tax-free. The remainder is taxable at your normal income tax rate.

And there is no limit to the amount of annual income you choose to take from your fund. Flexible drawdown is available to those of you who no longer pay into a pension.

To benefit from flexible drawdown, you used to have to prove you had additional, separate income of £12,000 a year or more. But this rule, known as the Minimum Income Requirement, was scrapped back in April 2015 – and there are no longer any restrictions.

What is flexi-access drawdown?

A term you'll hear frequently when you start investigating drawdown is flexi-access drawdown. Don't be phased by this: flexi-access drawdown or flexible access drawdown is just another name for flexible drawdown.

Drawdown dilemma

Leaving money invested rather than using it to buy a guaranteed income via an annuity carries an element of risk. There is always the chance that stock market falls can reduce the amount of capital you have.

But one of the main issues facing drawdown customers is: how do you make sure your money lasts throughout your retirement? The concern is that if you withdraw too much money from your fund too soon, your capital could be depleted long before you die, possibly leaving you with only the state pension to live on.

How to strike the right balance

It’s impossible to say what the right level of withdrawals should be. The lower the level of growth in your fund and the longer you live for, obviously the less cash you can afford to take out.

You cannot predict how long you will live, nor how share prices will perform in the future. But there are a number of online calculators that will give you an indication of how much income you might be able to take based on the size of your fund, as well as certain assumptions about growth rates and longevity.

The government-backed Pension Wise service has a calculator for what it calls adjustable income here. Just type in the size of your pension fund and the age at which you want to take it and it will give you an idea of what level of monthly income you can expect and for how long. 

Remember, you can always adjust your withdrawal levels later on if your fund is being depleted too quickly.

Extra protection

An increasing number of retirees are opting for a mix-and-match approach to their pensions.

Some may use their fund to buy an annuity while leaving the rest invested. This is a cautious approach which retains a certain level of guaranteed income in the form of annuity payments plus state pension, while still having the opportunity to benefit from stock market growth.

Use the services of a financial adviser to explain the pros and cons of all potential strategies and how they will suit your needs.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.