Pension drawdown, tax-free cash and the State Pension

Pension drawdown means keeping a defined contribution pension invested and taking money out as it is needed. In the planner, pensions are drawn only from the minimum pension age, tax-free cash is taken in one of three ways and capped by the Lump Sum Allowance, the rest of each withdrawal is taxed as income, and the State Pension is added from State Pension age. This page explains each part, with the rules the planner applies.

What is pension drawdown?

Drawdown is one way of taking money from a defined contribution pension: the pot stays invested and money is taken out over time, instead of being used to buy an annuity. MoneyHelper explains that a pension can be moved into drawdown in one go or gradually, often called phased or partial drawdown. Withdrawals other than tax-free cash are taxed as income in the year they are taken, and the money left in the pot can rise or fall with investment returns.

In the planner, a pension drawn as money is needed is drawdown in this sense. Each year it covers what other income and savings do not, in the withdrawal order set in the plan, from the pension access age.

How does a defined contribution pension work in the planner?

Each pot has a balance, an expected growth rate before charges, and a yearly charge as a percentage of the pot. Contributions come from the person and from their employer, entered either as a monthly amount or as a percentage of salary. Employer contributions are paid on top and never reduce take-home pay.

How are the three contribution methods treated?

What are the annual allowance, the taper and the Money Purchase Annual Allowance?

• Annual allowance. It limits the total contributions, personal and employer, that attract tax relief in a year. Contributions above it are left out of the projection and shown as capped.
• Taper. A person with high income loses £1 of annual allowance for every £2 of adjusted income above the upper limit, down to a minimum. The limits and the minimum are in the table of tax figures in UK tax rates and allowances 2026/27.
• Money Purchase Annual Allowance (MPAA). Once a person has taken taxable income flexibly from a defined contribution pension, contributions are limited to the MPAA, £10,000 a year, from the following tax year. Taking tax-free cash alone does not trigger it, and neither does buying an annuity.
• Relievable earnings. Personal contributions get tax relief up to the person's earnings, or up to the small gross amount in the table if they have none. Contributions above that are left out.

At what age can a pension be drawn?

Defined contribution pensions cannot be drawn before the normal minimum pension age. It is 55 until 5 April 2028 and 57 from 6 April 2028. You can set a different access age for a person, for example where a protected pension age applies. Protected ages are not detected automatically.

The picture at the top of this page shows what that means in a plan. Alex, an invented example, stops work at 55, but the pension cannot be drawn until 57, so after the savings run out there is a year in which spending is not met.

When can I retire? Retiring at 55 vs 67 compares stopping work at 55 and at 67 in another invented example, where savings cover the two years before the pension can be drawn, and explains the exceptions to the minimum pension age.

How do tax-free cash and the Lump Sum Allowance work?

Up to 25% of a pension can normally be taken tax-free, limited by the Lump Sum Allowance: £268,275 per person across all pensions, for most people. Each person starts with the full allowance. You can lower the remaining amount if some has been used, or raise it, for example if a protection applies. A tax-free lump sum from a defined benefit pension also uses up the allowance. What is the Lump Sum Allowance? explains the rules in full.

The planner has three ways of taking it:

• Upfront. 25% of the pot, capped by the allowance, is taken in one go at the age you choose and paid into cash, an ISA or a general investment account. The rest stays invested and is taxed as income when drawn.
• Each withdrawal part tax-free. A quarter of every withdrawal is tax-free and the rest is taxable income, until the allowance is used up.
• Phased. Tax-free cash is taken first, as money is needed. Later withdrawals are taxable income. This is the starting setting.

How much tax will I pay on my pension? shows how the taxable part of a withdrawal is taxed alongside the State Pension.

How much is drawn from a pension each year?

There are three withdrawal methods: only what spending needs, a set percentage of the pot each year, or a set amount each year in today's money. The fixed methods start at the age you give. The method is an assumption you choose. The planner does not compare methods or rank them. How long will my pension pot last? shows one invented example at two levels of spending.

How are final salary pensions and annuities treated?

• Defined benefit (final salary) pensions. An annual income from a start age, rising with inflation, not at all, or at a rate you set. They can include a tax-free lump sum and pay a survivor percentage to a spouse or civil partner; what happens to a pension when a partner dies? shows one in an invented example.
• Annuities. Bought from defined contribution pots at an age you choose, at the start of that year, for a price and an income you enter in pounds of the purchase year. The planner does not quote annuity rates. Annual increases and the survivor percentage are inputs.

How is the State Pension worked out?

The full new State Pension is £241.30 a week in 2026/27, and it is also in the table of tax figures in UK tax rates and allowances 2026/27. A person receives a share equal to their qualifying years divided by the years needed for a full pension, and nothing if they have fewer than the minimum number of years. The qualifying years you enter are the total expected by State Pension age. The model does not add years or fill gaps for you.

State Pension age comes from date of birth and the timetable currently in law: 66 for people born before 6 April 1960, 67 for people born from 6 March 1961 to 5 April 1977, and 68 for people born on or after 6 March 1978, with a month-by-month step in between. A future change to the timetable is not reflected until the model is updated. You can override the start age for any person.

What this looks like in the planner

Alex's invented example has the same plan three times, stopping work at 55, 60 or 67 with everything else the same, so the rules on this page can be seen working together.

• Stopping at 55. Savings cover the first year. The pension cannot be drawn until 57, so the next year is short. Pension withdrawals then meet spending until the money runs out again at 65.
• Stopping at 60. Savings are drawn first, then the pension, and the State Pension starts at 67. The money runs out at 80.
• Stopping at 67. Spending is met in every year to 90.

Open Alex's example in the planner to see the cash flow for each age, or open the comparison. The example is invented, its growth rates are assumptions, and the value of investments can go down as well as up. It shows the arithmetic of three retirement ages, not which one suits anyone: that depends on the person, and Pension Wise gives free guidance on the options to people aged 50 or over with a defined contribution pension.