How should I manage my money in drawdown?

Managing money in drawdown means balancing the income you need today with keeping your investments growing for the long term. It offers flexible access to your pension, but also brings risks like market swings and the danger of running out of money. Getting the basics right: sustainable withdrawals, a sensible mix of assets, and whether to combine drawdown with an annuity, is essential for a secure retirement.

Drawdown is a way to manage your money in retirement. You retain 'skin in the game' by remaining largely invested in the stock market

, whilst periodically taking out some money to provide you with an income.

It enables flexible access to retirement savings, but you do have to manage some key risks, including market volatility

and longevity (making sure the money doesn't run out).

Important things to get clear are how to set up sustainable withdrawals, diversifying

amongst key asset classes such as bonds and shares, and also working out whether you use annuities as well as drawdown.

Getting Going

I think there are 5 questions to ask yourself at the outset.

1. Retirement Expenses and Income

What will my annual living expenses be in retirement, including essentials like housing, healthcare, and travel?

How much do you currently spend a year? People can spend less in retirement but you may need about 70%–80% of your current income. Factor in inflation too – tricky to do today, but I'd assume around 3%. So you'll need to increase your annual assumptions just to keep up with the cost of living.

Add in a cash buffer for those unexpected financial hits.

And don't forget to factor in your State Pension – the full amount is around £11,500 each year from age 67. You can get a State Pension forecast here.

2. Income Sources

What income sources will you have in retirement?

This could include the State Pension, workplace pensions, drawdown, or part-time work. Don't forget any ISAs you may have saved.

3. Longevity Risk

How long do you think you might live for and will your plan cover 30 years or more of retirement if you need it to stretch?

Some platforms have calculators for things like pension value, compound interest

and life expectancy, e.g. Aviva and Hargreaves Lansdown.

The average life expectancy in the UK today is 83 for women and 79 for men [1].

4. Risk Tolerance

How comfortable are you with the ups and downs of stock markets?

The general rule of thumb used to be a switch to about 40% in shares and 60% in bonds and cash in retirement. The younger you are, the more you should have in shares as these stand the best chance of growing. If you go too 'safe' too early, you risk your money running out.

5. Legacy Goals

Do you want to leave an inheritance, and how does that affect choices like drawdown versus annuities?

Drawdown will preserve flexibility for heirs (who get this tax-free if you die before the age of 75), while annuities forfeit this but guarantee income.

On IHT changes from 2027 and the impact on legacy goals

Charles Riches, financial planner at Capital Partners, has been fielding anxious calls on this for months.

But from 2027, that logic is changing.

For many people who had saved up their pension as part of their retirement strategy to give away to loved ones, the new rules mean there’s now a real need for a change of strategy to ensure their inheritance is as tax-efficient as possible. (Don’t forget that transfers to spouses or civil partners will still remain exempt from the tax, though.)

Beyond the question of legacy, these changes are also reshaping something more fundamental – the order in which retirees draw on their wealth. The classic approach for many clients — ISAs first, pensions last, was built on the assumption that the pension was the most IHT-efficient asset in the room. Remove that assumption, and the whole calculation changes entirely.

The questions Charles is currently fielding would not have happened even two years ago. Should clients start drawing their pension earlier than they need to, specifically to shrink the fund that will eventually sit in their taxable estate? Should they channel that income into regular gifts, using the 'normal expenditure out of income' exemption? And for those with larger estates, there’s a more subtle trap; pensions counted in the estate from 2027 could push some people above the £2 million residence nil-rate band taper threshold, costing up to £140,000 in additional IHT through the loss of that allowance alone.

Drawdown Rules of Thumb

Once you've got a sense of your approach to these questions, it's time to start working out some sums.

4% Rule Baseline: The basic rule used to be that you could withdraw 4% of initial pot in year 1 (e.g., £40k on £1m), then inflate annually by inflation which could be assumed to be around 3%. If you have at least half of your money in shares, this should keep you going for around 30 years. Some question the 4% level, but it's not a bad starting point.

Cash Bucket: Consider keeping 2–5 years' spending (£50k–£150k average UK retiree) in cash equivalents (fixed-term savings, Premium Bonds if you like them, top rate cash accounts) for sequencing safety. This means you don't need to sell your shares to fund your income when markets are having a terrible time.

Managing Money in Drawdown

The first thing you need to work out is your asset allocation.

Asset Allocation

In pension drawdown, consider shifting to a more conservative asset allocation

as you enter retirement to protect your money while allowing growth.

This depends on your age, health, and risk tolerance. Diversification across asset classes reduces sequencing risk – this is when poor early-retirement returns amplify losses when you sell and take money out when markets are low.

Income Sequencing

Income sequencing

addresses the risk of unfavourable market returns early in retirement, depleting your pot faster, known as sequencing risk. Mitigate it by using a lower initial withdrawal rate (e.g., 3–4% of pot value, adjusted for inflation) and drawing first from cash/bonds during downturns to let equities recover.

Some people adopt what is known as variable sequencing – maybe 5% early (ages 60–70), tapering to 3% later. This matches higher active spending phases and preserves capital for longevity.

Don't forget your State Pension (around £11,500/year full rate from age 67+), any ISAs for tax-free income, and decent cash buffers to avoid selling low.

Manage the Early Years

Your first 5–10 years are important. The aim of the game is to keep your pot a decent size so it continues to grow. Consider holding a few years of expenses in low-risk cash or bonds to avoid selling equities during downturns and to give them a chance to recover.

In turmoil such as the recent war in Iran, consider adjusting your withdrawals dynamically – cut spending temporarily in bad markets (e.g., reduce by 10–20%) rather than sticking to fixed amounts that risk exhaustion.

Also sequence tax-efficiently. Consider drawing tax-free pension lump sums or ISAs first and delaying taxable income to fill your personal allowances (currently about £12,570 a year).

Work Out Your Buckets

Every year, it's worth having a look at these buckets and topping the short and medium term ones up from the long-term pot. It's important to have a cash buffer but you also don't want too much in cash too soon.

Don't Forget Tax

If you are a higher-rate taxpayer (40% band over £50,270 income), maximising the tax-free 25% pension lump sum (up to £268,275 Lump Sum Allowance) involves strategic timing, phasing, and reinvestment to avoid pushing taxable income higher or taxing growth prematurely. The goal is to preserve its tax-free status while using it efficiently in tax-sheltered vehicles.

Take in Phases

Withdraw the lump sum gradually over multiple tax years rather than all at once to stay within or near the basic-rate band (£12,571–£50,270), minimising tax on any linked drawdown income.

Consider crystallising portions of your pension pot annually (e.g., £50k tax-free each year), leaving the rest invested—providers like flexi-access drawdown allow this without triggering full taxation. This sequences tax-free cash to fill personal allowances or offset low-income years, avoiding the higher-rate trap on subsequent withdrawals.

Other Tax-Efficient Approaches

ISA Wrapper: Transfer directly to a Stocks & Shares ISA (up to £20k/year allowance) for tax-free growth and dividends—ideal for higher-rate taxpayers facing 40% income tax + 2.4% dividend tax otherwise. Prioritise this over general investments, as interest/dividends on non-sheltered accounts (e.g., savings) attract Personal Savings Allowance limits (£500 for higher-rate).

GIA or Premium Bonds: For short-term needs, consider using cash ISAs or NS&I Premium Bonds (tax-free prizes).

Avoid Pension Recycling: Don't recontribute to pensions (triggers anti-recycling rules: tax-free cash reduces annual allowance by amount recycled).

Drawdown vs Annuities

Don't Forget Annuities

Hybrid with partial annuity (20–30%) for essentials minimises sequencing risk.

Drawdown offers flexibility, investment growth potential, and inheritance (tax-efficient if death before 75, though IHT changes loom post-2027), but exposes you to market risk, depletion, and management effort.

Annuities provide guaranteed lifetime income (enhanced for age/health), shielding from volatility/inflation (via index-linked options) and simplicity, but lack flexibility, inheritance, and growth—plus poor rates lock in low income.

Choose drawdown if risk-tolerant with legacy goals; annuities for security-focused retirees with essentials coverage needs.

Both Drawdown and Annuities

A hybrid (blended) approach uses 30–50% of pot for an annuity covering essentials (bills/food), with the rest in drawdown for lifestyle/flexibility and growth. This balance guarantees against sequencing risk with upside potential and inheritance. Ideal for moderate risk profiles.

Since the Iran war started, according to Legal & General. Income from a £100,000 level annuity has risen by around £100 to £6,300 a year (based on a 65-year-old man with a 50 per cent spouse’s pension). Over the past five years, the rises have been stark. In early 2021, comparative rates were just £3,800 a year, so annuities have certainly become more interesting for consumers planning for retirement.

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[1] ONS