How Pension Drawdown Is Calculated

Summary

Pension drawdown (formally “flexi-access drawdown”) lets you keep your defined-contribution pension pot invested while withdrawing income as needed. Available from age 55 (rising to 57 from April 2028), it replaced the old annuity-or-nothing model when pension freedoms launched in April 2015.

The key question this calculator answers: “How long will my pension pot last, and what will I actually take home after tax?”

How it works

Pension drawdown has three main mechanics:

1. Tax-free lump sum (PCLS)

You can take up to 25% of your pension pot as a tax-free Pension Commencement Lump Sum (PCLS), subject to the Lump Sum Allowance of £268,275. This allowance is a lifetime cap across all your pensions — it replaced the old Lifetime Allowance (abolished April 2024).

2. Taxable income withdrawals

Everything withdrawn beyond the PCLS is taxed as earned income at your marginal rate. Crucially, pensioners do not pay National Insurance on pension income — only income tax applies.

Your total taxable income for the year includes:

• Pension drawdown withdrawals
• State Pension (£11,973/year for a full 35-year record in 2025/26)
• Any other income (rental, part-time work, etc.)

3. Remaining pot stays invested

The pot you don’t withdraw remains invested. Growth compounds tax-free inside the pension wrapper. The balance between withdrawals and investment growth determines how long your pot lasts.

The formulas

Income tax on drawdown (2025/26)

The Personal Allowance tapers by £1 for every £2 of income above £100,000, creating an effective 60% marginal rate in the £100,000–£125,140 band.

Withdrawal rate sustainability

The effective withdrawal rate (annual drawdown / pot after PCLS) is a key indicator of whether your pot will last:

Worked examples

Inputs explained

• Pension pot — the total value of your defined-contribution pension at the point of entering drawdown
• Annual drawdown — how much you plan to withdraw each year (before tax). This increases annually by the inflation rate to maintain purchasing power
• Investment return rate — expected nominal annual return on the invested pot. 4–5% is a common assumption for a balanced portfolio
• Inflation rate — annual rate at which your drawdown amount increases. 2% matches the Bank of England target
• Annual State Pension — the full new State Pension is £11,973/year (2025/26). Reduce if you have fewer than 35 qualifying years
• Other annual income — any other taxable income (rental, part-time work, other pensions). Affects your tax bracket
• Take 25% lump sum — whether to take the PCLS upfront. Taking it reduces the invested pot but provides immediate tax-free cash
• Drawdown start age — when you begin withdrawing. Currently must be at least 55 (57 from April 2028)
• Life expectancy — how long you need the pot to last. ONS average is ~87 for a 65-year-old; plan conservatively

Outputs explained

• Monthly net income — your actual take-home each month (drawdown after tax + State Pension)
• Pot longevity — how many years the pot lasts, or “indefinitely” if growth exceeds withdrawals
• Tax-free lump sum — the PCLS amount (25% of pot, capped at £268,275)
• Withdrawal rate — annual drawdown as a percentage of the pot after PCLS, with a sustainability verdict
• Year-by-year schedule — detailed projection showing gross withdrawal, tax, net income, and remaining pot for each year

Assumptions & limitations

• Uses England/Wales/NI income tax bands. Scotland has different rates (starter 19%, intermediate 21%, advanced 45%, top 48%). The calculator does not currently model Scottish tax.
• State Pension is assumed constant — in practice it increases annually by the triple lock (highest of inflation, wage growth, or 2.5%).
• Investment returns are applied annually at a flat nominal rate. Real portfolios experience sequence-of-returns risk — poor returns early in drawdown are far more damaging than poor returns later.
• No platform fees or fund charges are modelled. Typical annual charges of 0.5–1% reduce effective returns.
• Drawdown increases uniformly with inflation. In practice, retirees often spend more early (“go-go” years) and less later (“slow-go” years).
• Tax bands are frozen at 2025/26 levels. The government has frozen thresholds until 2028; beyond that, fiscal drag will change effective rates.
• The calculator does not model the Money Purchase Annual Allowance (MPAA) — once you flexibly access pension income, future pension contributions are limited to £10,000/year.

Verification