Phased or partial pension drawdown explained

If you have a defined contribution pension, putting it into drawdown lets you:

• take up to 25% as a tax-free lump sum at the start 

• keep the rest invested so it can benefit from investment growth

• take taxable money as and when you need it. 

You can either choose to move your pension into drawdown:

• in one go, or
• gradually over time – called phased or partial drawdown.

You do not have to take the full 25% tax-free or any at all. The more you take now, the less you’ll have to give you an income later. 

The maximum amount you can take tax-free from all your pensions is £268,275 for most people, called the lump sum allowance.

Instead of committing your entire pension to drawdown, phased drawdown lets you:

• transfer smaller portions over time

• take up to 25% of each portion tax-free. 

This means you have the option to take tax-free cash over time, not just the first time you put your pension into drawdown.  

This might benefit you if you want to take tax-free cash but do not need it when you first retire, so that amount can remain invested in your pension until you actually need it.

For example, if your pension is currently worth over £20,000, you could move £10,000 into drawdown without taking any tax-free amount. Then, at a later date, move £7,500 into drawdown and take £2,500 as a tax-free lump sum – and so on.

By moving smaller amounts into pension drawdown, you might be able to spread how much you take across different tax years. This can help you avoid moving into a higher Income Tax band.

You can see the Income Tax bandsOpens in a new window and Scottish Income Tax bandsOpens in a new window on GOV.UK.  

This works in the same way as the option to take your pension as multiple lump sums, where 25% is paid tax-free and the rest is taxable.

When you pay into a pension, the government usually adds a top-up payment called tax relief. This is the money you’d normally pay in Income Tax. 

You can usually get tax relief on all your pension contributions up to the annual allowance. For most people, this means:  

• your contributions must be less than (or equal to) the amount you earn, and  

• contributions from you and your employer, including tax relief, must be less than £60,000.  

But if you take taxable money from your defined contribution pension (like taking multiple lump sums or money from a drawdown pot), the £60,000 limit reduces to £10,000. This is called the money purchase annual allowance (MPAA).  

If you use phased drawdown to only withdraw your tax-free lump sums and leave the taxable part invested, you will not trigger the MPAA.

Just be aware that if you take tax-free money from a pension and use it to significantly increase your contributions back into a pension, this might break pension recycling rulesOpens in a new windown

If it does, you’ll usually have to pay tax worth up to 55% of the tax-free lump sum you received.

Each time you move money into drawdown, you’ll usually pay transaction or withdrawal fees. If these are high, moving small amounts into drawdown regularly might be costly.

It’s also worth considering that:

• your retirement income is not guaranteed, as your invested pension can rise or fall until you take the money

• you need to plan carefully to make sure your money lasts your full retirement 

• you might need to change the way your pension is invested so you do not miss out on potential growth

• a higher income can affect your entitlement to benefits

• your pension income might be claimed to repay debts

• money left in your pension can be inherited tax-free if you die before age 75. 

For more information see our full guide about pension drawdown.

Putting your pension into drawdown is just one way to take money from your defined contribution pension.  

You can also choose to: 

• take your pension in one or more lump sums, with 25% of each amount paid tax-free 

• take some tax-free cash (up to 25%) and convert the rest into guaranteed income by buying an annuity. 

It’s worth asking your pension provider if you have any special features before comparing your options.

For example, your pension might offer guaranteed annuity rates that would give you a higher guaranteed income than you could buy on the open market.

For more information on all your options, see our guide What can I do with my pension pot?

We also offer free and impartial Pension Wise guidance appointments to explain your pension options.

If pension drawdown is right for you, there are some steps to take:

1. Compare providers to find the best deal – your current pension provider might not offer phased drawdown, charge high fees, have minimum amounts you must put into drawdown or limited investment options.
2. Plan your withdrawals to limit the amount of tax you’ll pay.
3. Check the correct amount of tax has been taken off, as providers often use emergency or temporary tax codes when you take a lump sum. 
4. Regularly check the value of your invested pension, how well it’s performing and if you need to change how it’s invested or how you take the money.

For full information, see How to put your pension into drawdown.

Do not access your pension or transfer any money to a pension provider because of a cold call, visit, email or text. It’s likely a scam designed to steal your money.

You might lose all your retirement savings and have to pay an expensive tax bill. For more information, see our guide How to spot a pension scam.

If you have any questions about your pension, our pension specialists can help – it doesn’t matter how old you are.  

How you choose to take your pension can affect how comfortable your retirement is.  

A regulated financial adviser can help you plan for retirement, including:  

• recommending products and providers to use 

• advising where to invest your money   

• explaining your options to reduce the tax you might need to pay.  

Our guide can help you find a pension or retirement adviser. Financial advisers must tell you how much you need to pay before you commit.