Drawdown, annuities and lump sums: turning your pension into an income
A defined contribution pension can be taken as a secure income, kept invested and drawn flexibly, or taken as lump sums. The choice affects how much tax you pay, how long the money lasts and what is left for your family.
By Vince De Stefano, Head of Financial Services
Updated 26 October 2026
4 min read
Key takeaways
- You can usually take 25% of your pension tax-free, up to the £268,275 lump sum allowance. The rest is taxed as income when drawn.
- Drawdown keeps the fund invested and lets you vary your income. An annuity gives a guaranteed income for life.
- Taking taxable income flexibly reduces the amount you can then pay into pensions to £10,000 a year.
- The first payment is often taxed on an emergency basis. Overpaid tax can be reclaimed.
Tax-free cash
From age 55, rising to 57 on 6 April 2028, you can normally take up to 25% of a defined contribution pension tax-free. The total tax-free cash across all your pensions is capped by the lump sum allowance of £268,275, unless you hold a protection that gives a higher figure. You can take it all at once or in stages, each time you move part of the fund into drawdown.
Taking the full amount on day one is not always best. Money left in the pension stays invested and can grow free of tax, although its value can also fall. Taking it in stages can provide a tax-free element to each year's income.
Flexi-access drawdown
With drawdown, the fund stays invested and you choose how much income to take and when. Withdrawals above the tax-free element are taxed as income in the tax year you take them. Drawdown suits people who want flexibility and are comfortable with investment risk, but the income is not guaranteed and the fund can run out if withdrawals are too high or markets fall early in retirement.
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Annuities
An annuity converts part or all of your fund into a guaranteed income, usually for life. Options include increases each year with inflation, a guaranteed payment period, and a pension for a spouse or partner after your death. Annuity rates move with interest rates, so compare quotes from several providers when you buy. If you have health conditions or smoke, an enhanced annuity may pay more.
Many people combine the two: an annuity to cover essential spending alongside the State Pension, and drawdown for the rest.
Taking lump sums
You can also take one or more lump sums directly from the pension without setting up drawdown. Each one is 25% tax-free and 75% taxed as income. Taking a large sum in a single tax year can push you into the higher or additional rate, and income over £100,000 loses part of the personal allowance.
Two rules to know before the first withdrawal
- Money Purchase Annual Allowance. Once you take taxable income from drawdown or most lump sums, the amount you can pay into defined contribution pensions with tax relief falls from £60,000 to £10,000 a year. Taking only tax-free cash, or a small pot lump sum, does not trigger it.
- Emergency tax. Providers usually tax the first payment as if it will be repeated every month, which often means too much tax is deducted. You can reclaim it from HMRC straight away using form P55, P53Z or P50Z, or wait for it to be adjusted at the end of the tax year.
The government's free Pension Wise service, run by MoneyHelper, offers guidance appointments to people aged 50 and over with a defined contribution pension.
The order in which you draw from pensions, ISAs and other savings affects your income tax each year and, from April 2027, the inheritance tax on what is left. See pensions and inheritance tax.
Frequently asked questions
How much of my pension can I take tax-free?
Normally 25%, up to a total of £268,275 across all your pensions unless you have a protected higher amount.
Is drawdown or an annuity better?
It depends on how much secure income you need, your health, your attitude to investment risk and what you want to leave. Many people use both.
What is the Money Purchase Annual Allowance?
Once you take taxable income flexibly from a pension, the amount you can contribute to defined contribution pensions with tax relief falls to £10,000 a year.
Why was so much tax taken from my first pension withdrawal?
Providers often apply an emergency tax code to the first payment. You can reclaim the overpayment from HMRC using form P55, P53Z or P50Z.
Sources & further reading
The value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on your circumstances and may change.
This article is general information, not advice. Tax, financial and legal rules change and their effect depends on your circumstances. Check the current position and take professional advice before acting. Last reviewed 26 October 2026. Totus One Limited (company no. 16855798).
An independent financial planner advising individuals and families on pensions, investments, protection and inheritance.
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