4.2 Managing Drawdown Over Time

4.2 Managing Drawdown Over Time

Once you’ve accessed your pension through drawdown, the real work begins. Managing withdrawals year after year requires careful planning — not just at the start. This chapter explains how to keep your drawdown strategy sustainable, flexible, and tax-smart.

What Is Pension Drawdown?

In a flexi-access drawdown arrangement, your pension stays invested and you draw income as needed. It offers flexibility, but you take on the risk of:

• Running out of money too soon
• Market crashes or poor investment returns
• Making tax-inefficient withdrawals

Managing drawdown is about balancing what you take out with how the pot performs.

Key Challenges in Managing Drawdown

The goal is to provide stable, sustainable income over a retirement that could last 30+ years.

How Much Can You Safely Withdraw?

There’s no fixed rule — but you’ll often hear about the 4% rule:

• Withdraw 4% of your pot in the first year, then increase by inflation
• Designed to make your pot last 30+ years in most historical scenarios
• Originally based on U.S. data — may be too optimistic in the UK context

In reality, flexible withdrawal rules work better:

• Withdraw less after bad investment years
• Increase income only when returns allow
• Keep some buffer in cash or low-risk assets

Safe Withdrawal Strategies

Here are a few proven approaches:

The best strategy is one you can stick with through market ups and downs.

Managing Tax Over Time

Drawdown income is taxable — and needs to be managed:

• Avoid breaching the personal allowance (£12,570) if possible
• Combine with ISA income or tax-free lump sums to stay in lower bands
• Watch for creeping into higher-rate tax as State Pension begins
• Consider gifting or saving unused income to reduce future IHT

⚠️ Remember: once you trigger flexible drawdown, your annual pension contribution limit drops to £10,000/year (MPAA).

Reviewing Your Plan Annually

Sustainable drawdown isn’t set-and-forget. Key review points each year:

• How did your investments perform?
• Are you drawing too much?
• Has inflation changed your real income?
• Do you need to rebalance?
• Any changes in tax rules or personal goals?

Many people adjust income every 1–3 years, not every month.

Example: Adaptive Drawdown Plan

Martin, age 66, enters drawdown with £300,000. He plans to draw:

• £12,000/year from the pot
• State Pension of £11,500/year starts at 67
• He keeps 2 years’ income (£24,000) in cash buffer
• After a strong investment year, he increases drawdown to £13,000
• After a market dip, he freezes withdrawals at £11,000 to allow recovery

His flexibility helps maintain sustainability and control tax exposure.

Checklist: Good Drawdown Practice

Summary: Managing Drawdown for the Long Term