Is a drawdown pension a good idea in 2025?
With new tax rules on the horizon and market conditions shifting, we look at whether pension drawdown is a smart choice for your retirement plan
If you're approaching retirement or are already there, you might be asking: is a drawdown pension a good idea? With changing market conditions, rising annuity rates, and evolving tax rules, it's a timely question, and the answer depends on your personal goals, risk tolerance, and financial situation.
Here, we’re looking at how pension drawdown works, the pros and cons and how pension drawdown can fit into your retirement income planning at this moment.
How does pension drawdown work?
Pension drawdown (also known as flexi-access drawdown) lets you keep your pension pot invested while drawing an income from it. You can typically take up to 25% of your pension tax-free, with the rest remaining invested. You then withdraw income as needed, which is taxed as regular income. Tax treatment depends on individual circumstances and is subject to change.
In practical terms, it’s very similar to any other investment pot, such as an ISA or general investment account, in that you have control over how the money is invested and (once you’ve reached retirement age – currently 55 and rising to 57 in 2028) how you access the money. The key difference between a pension account and other types of investment accounts are the tax rules that apply, as well as the age limits around access to pension funds.
Unlike an annuity, which provides a fixed income for life, drawdown gives you flexibility and the potential for investment growth. But it also means taking on more responsibility and risk, as pension investments can go down as well as up.
Recent changes to pension drawdown
The 2024 Autumn Budget brought with it some major changes to pensions and the position of flexi-access drawdown within a retirement plan. Specifically, while pension assets (including drawdown) are currently exempt from inheritance tax (IHT), Chancellor Rachel Reeves announced that this will change on 6 April 2027, if the legislation is enacted as announced.
This moves pension drawdown from being a very effective tax planning tool, to having the potential for higher total tax implications than other forms of retirement income or investment.
Benefits of pension drawdown
- Flexibility. You control how much income you take and when. This is ideal if your spending varies or you have other income sources.
- Potential for growth. Your pension stays invested, giving it the chance to grow, which is especially important if you expect a long retirement.
- Tax planning opportunities. You can manage your withdrawals to stay within income tax thresholds, potentially reducing your overall tax bill.
- Inheritance benefits. Currently, if you die before age 75, your remaining pension can usually be passed on tax-free of IHT. However, as mentioned this may change from 6 April 2027 if legislation is enacted to charge IHT on pension assets.
Downsides of pension drawdown
- Market volatility. Your pension is exposed to market ups and downs. Poor returns early in retirement (known as sequencing risk) can reduce how long your money lasts.
- No guaranteed income. Unlike an annuity, drawdown doesn’t guarantee income for life. You could run out of money if you withdraw too much or your investments underperform.
- Inheritance tax risks. Recent changes have made pensions less attractive for inheritance, if legislation goes ahead as planned. If you hold back too much hoping to pass it on, your beneficiaries could face double taxation, income tax and potentially IHT.
- Investment responsibility. You (or your adviser) must manage the investments. This can be stressful, especially during periods of economic uncertainty.
Pension drawdown vs. annuities
Even before the announcement of the proposed changes to pensions legislation, annuities have begun to become a more viable retirement income option in recent years. A major driver of this is the fact that annuity rates have improved significantly as interest rates have risen from historic lows.
That means the trade-off between flexibility and certainty has shifted. For some retirees, locking in a guaranteed income now looks more appealing, especially if the potential investment gains from drawdown are only marginal.
Some retirees are now choosing to reduce their investment risk and opt for more predictable income, particularly if they’re uncomfortable managing a portfolio in volatile markets.
Finding the right retirement strategy for you with Evelyn Partners
If you value flexibility, have other income sources and are comfortable with investment risk, drawdown can be a powerful tool. But if you want certainty or are concerned about market volatility and tax implications, it may be worth considering other options, like annuities or a blended approach.
Especially with the proposed changes to IHT treatment on pensions, there’s a lot to consider. Before making a decision, it’s important to get personalised advice. A financial planner can help you weigh up the pros and cons based on your goals, lifestyle and risk tolerance.
Book a free initial conversation with one of our advisers or speak to your usual Evelyn Partners contact to discuss the options that make the most sense for you.
