Pension drawdown: What you should know and top providers
By Boring Money
19 Dec, 2024
Planning for retirement in the UK is about more than just saving enough; it’s also about finding the right strategy to access your money when the time comes to start using it. Pension drawdown is a way of accessing your retirement savings with flexibility and control, so you can tailor your income to your specific needs. This guide explains how pension drawdown works, its advantages and risks, and who the best providers are in the UK if this retirement strategy sounds right for you.
What is pension drawdown?
Pension drawdown, sometimes also called income drawdown, is a method of accessing your retirement savings. In simple terms, it’s a way of setting up a flexible income for yourself - “drawing down” - while keeping your remaining savings invested. Unlike annuities, which provide a fixed income for life, drawdown lets you adjust your withdrawals to suit your circumstances.
The pension drawdown approach is ideal for those who want control over their retirement income while potentially benefiting from investment growth from the funds left in their pot. However, as is always the case with investing, this also comes with risks such as market volatility, as well as the possibility of running out of funds if you don’t plan accordingly. Let’s discuss in more detail how drawdown works and the key advantages and disadvantages.
How does pension drawdown work?
Flexible withdrawals: Adjust how much and when you withdraw income.
Investment growth: Your pension remains invested, offering growth potential.
Tax-free lump sum: Take up to 25% of your pension pot tax-free.
Customisable income: Tailor your withdrawals to fit your lifestyle.
Pension drawdown lets you take money out of your pension pot while the rest stays invested, hopefully continuing to grow. Once you hit 55 (or 57 from 2028), you can usually take 25% of your pot tax-free as a lump sum. The rest goes into “drawdown”, where you can dip in and take income as you need to support yourself in retirement. This can be monthly, yearly, or occasionally to cover the cost of big expenses.
Unlike an annuity, which gives you a fixed income for life, pension drawdown keeps things flexible. But this flexibility comes with responsibility. You’ll need to plan ahead and manage how much you withdraw to avoid running out of money too soon. And there’s always the risk that poor investment performance could shrink your remaining pot and leave you with less than you were aiming for.
Some – particularly those with large retirement savings or complex needs – may want to enlist the help of a qualified financial adviser to make sure they’re making the right decisions. After all, we’re talking about your retirement savings here. You’ve spent a lifetime saving it all up, so you want to be sure you’re not going to make any costly mistakes!
When planning for drawdown, you’ll need to consider how to invest your remaining pot to balance growth and risk, monitor how these investments perform, and regularly review how much you’re taking out. It’s important to know your withdrawals are taxed like regular income, so taking too much in one go could push you into a higher tax bracket. On the flip side, keeping a careful eye on your strategy can mean your pot lasts longer, giving you more freedom to enjoy retirement.
Pension drawdown isn’t one-size-fits-all, but for those comfortable with risk and ready to stay engaged, it can offer control, growth potential, and maybe even something to pass on to your loved ones.
Pros and cons of pension drawdown
Pension drawdown provides several advantages over other retirement options. But it isn't perfect either. Here’s a quick summary:
*NB. The rules have recently changed! From the 2027-28 tax year, pensions will be included as part of your estate for Inheritance Tax purposes.
Who is pension drawdown best for?
All this being said, pension drawdown isn’t for everyone. It’s likely to suit individuals who:
Want control over their retirement income
Are comfortable with some investment risk
Prefer a dynamic approach to managing their pension savings
Are willing to review their investments regularly
If you prefer a guaranteed income without managing investments, an annuity might be a better fit.
Top providers for pension drawdown
If you're considering pension drawdown, our in-house analysts have crawled the pension landscape to pull out their top three suggestions for providers which have the best drawdown service on the market.
Fidelity
Fidelity is a popular investment platform in the UK, boasting a wide range of investments and competitive fees for larger portfolios. It also offers free guidance and a specially-appointed personal relationship manager for account holders with portfolios worth over £250k - potentially a useful addition for those with larger pensions who would value professional guidance when deciding how to manage their retirement savings.
Fidelity's website has a wealth of educational resources around pension drawdown, including a handy drawdown calculator, which can be used to calculate how long your retirement income might last according to different drawdown scenarios. There's also a helpful drawdown FAQ section and even a retirement guidance service, where Fidelity advisers offer free guidance and personalised paid for advice for your queries around drawdown. It's open from 9am to 5pm, Monday to Friday.
Finally, Fidelity also offers 'Investment Pathways' - a series of funds designed around four targets for retirement income, ranging from ‘I have no plans to touch my money in the next five years’ to ‘I plan to take out all my money within the next five years’. Each goal corresponds with a Fidelity fund. This could be an attractive option for those keen for hands-off approach to post-retirement investing.
Crucially, there are no specific drawdown fees with a Fidelity pension. All you pay is the usual service fee for the SIPP and any fund/investment charges based on what investments you choose.
Hargreaves Lansdown
Hargreaves Lansdown is one of the most popular investment platforms and supports the widest range of investments in the UK. Its not the cheapest, but its known for its breadth of choice, brand longevity, helpful customer service and easy-to-use interface, all of which have made it a firm favourite among UK investors for many years.
Like Fidelity, there is plenty to read and learn from about pension drawdown on the Hargreaves Lansdown website, including a free to download comprehensive drawdown guide. It also has a drawdown calculator, as well as a shortlist of suggested funds which align with different investment goals post-retirement - growth, income and defensive. You can dive even deeper into drawdown with insightful articles on topics such as 'Pension Drawdown: four reasons to transfer' and 'Annuity vs. drawdown: or can I have both?'.
There is also a lengthy FAQ section and a helpdesk open six days a week to tackle your questions on pension drawdown. Or, if you're proceeding with plans to drawdown, existing Hargreaves Lansdown customers can access retirement advice via its Financial Planning Service, where you can work with an adviser to develop a tailored strategy to prepare for retirement, including an assessment of your income needs and most suitable options.
Like Fidelity, there is no specific drawdown fee with Hargreaves Lansdown. It's free to set up drawdown with a Hargreaves Lansdown pension, and customers have the freedom to start, stop or change their withdrawals whenever without charge. However, bear in mind that the usual pension service fee and investment charges still apply.
PensionBee
PensionBee is a relative newcomer to the market, but has exploded in popularity in recent years thanks to its slick design and user experience, smooth pension consolidation service, and compelling marketing strategy.
One of the main appeals of PensionBee is that it makes it easy to keep track of your withdrawals and overall pot on its handy app. There's also lots of educational material and a drawdown calculator to help you get to grips with your drawdown questions, presented in a friendly and easy-to-digest way. Especially helpful given how complex pensions can be at times!
Perhaps the downside to PensionBee as a drawdown provider is the limited range of investments on offer, and for those keen investment beans, there's no option to hold shares directly in a PensionBee drawdown account. Like Fidelity, PensionBee offers four goal-aligned 'Investment Pathways' that are designed to match your post-retirement investment needs, and these can be a weight off your shoulders if you would rather just hand over the tough decisions to the experts and focus on enjoying your retirement (rather than number-crunching trying to devise the perfect portfolio all by yourself).
There are no drawdown costs with PensionBee, unless you take your entire pot within 12 months, so the only charge you'll be faced with is an annual fee of between 0.50 - 0.95% to manage your pension account. If your pot has been with PensionBee for less than a year and you withdraw it in full, then a withdrawal fee of £150 applies.
How to get started with pension drawdown
If you’re considering pension drawdown, follow these steps to get started:
Step 1: Take our retirement quiz to see if you’re on track
If you’re yet to retire, use our 5-minute quiz to find out how much you’ve saved so far, determine your retirement lifestyle needs, and see if you’re on the right track – or if you need to make some changes to hit your goals.
Step 2: Check your provider supports drawdown
Check if your current pension provider(s) support drawdown. Hint: not all do! Here are some notable providers which have historically offered drawdown services:
Legal & General
Royal London
Scottish Widows
Standard Life
Get in touch with your provider if you’re not sure and make sure you understand your withdrawal options. Some providers will be very flexible, allowing you to stop or vary the amount you take at any time, whereas others will have some restrictions around when you can withdraw – e.g. quarterly, half-yearly or annually.
If you find that your current pension provider doesn’t support drawdown, you may want to consider moving your funds to a provider that does. This isn’t always an easy process and typically involves large amounts of money if you’re close to retirement, so it’s a wise idea to contact a qualified financial adviser or planner who can assist you and make sure you’re making the right decision. For example, you may encounter hefty exit fees. Think carefully before moving your funds and, if in doubt, run your decision past a qualified professional.
Step 3: Develop your withdrawal plan
Finally, once you’re on top of your finances and you’re happy with your pension provider, you’ll need to decide on a strategy for withdrawing your income while managing your remaining investments. You’ll need to think about how often you want to withdraw, how much (remember withdrawals count towards your taxable income), and what investment strategy is best suited for what’s left in your pot.
These are all tricky decisions and unique to your personal and financial circumstances. If you’re a bit of a whizz, you might be able to determine all of this by yourself, but we do recommend you get financial guidance or advice at this stage just to be sure. Some advice firms offer one-off advice packages which can help you for a single fee – e.g. Charles Stanley offer a one-off Retirement Plan package for £900 +VAT. Alternatively, you can browse our Contributors directory to find qualified advisers and planners who you can reach out to for help.
Conclusion
Pension drawdown in the UK offers a flexible way to manage your retirement income, giving you control and the potential to grow your remaining investments. However, it also requires careful planning, regular reviews, and a clear understanding of the risks involved. By choosing a reliable provider and developing a sustainable strategy, you can use drawdown to enjoy a comfortable and secure retirement.
