Pension Drawdown for the Self-Employed

What Is Pension Drawdown?

Pension drawdown (or flexi-access drawdown) lets you take money from your pension pot while the remainder stays invested. You choose how much to withdraw and when, giving you complete flexibility over your retirement income.

This is in contrast to an annuity, which pays a fixed income for life but offers no flexibility once set up.

How Drawdown Works

1. You reach pension age (currently 55, rising to 57 from 2028)
2. You take up to 25% of your pot as a tax-free lump sum (if you choose)
3. The remainder goes into a drawdown fund
4. You withdraw money from the drawdown fund as needed
5. Withdrawals are taxed as income
6. The remaining pot stays invested and can continue to grow

Why Drawdown Suits the Self-Employed

Self-employed people are used to irregular income. Drawdown mirrors this flexibility:

• Variable withdrawals — take more in months when you need it, less when you do not
• No fixed commitment — unlike an annuity, you can change your withdrawal amount at any time
• Continued growth — your pot remains invested, potentially growing even during retirement
• Tax management — control your withdrawals to stay within lower tax bands

Many self-employed people do not fully retire — they wind down gradually, taking on fewer clients over time. Drawdown complements this pattern perfectly, allowing you to supplement your reduced business income with pension withdrawals.

Tax on Drawdown

The 25% tax-free lump sum is straightforward — no tax at all. Everything else is taxed as income:

• The first £12,570 of total income is covered by your Personal Allowance (no tax)
• £12,571 to £50,270: 20%
• £50,271 to £125,140: 40%
• Above £125,140: 45%

If your only income in retirement is your pension, you can withdraw approximately £16,760 per year tax-free (£12,570 Personal Allowance plus the tax-free element of each withdrawal).

Managing Tax in Drawdown

Keep total annual withdrawals within the basic rate band if possible. If you need a large one-off amount, consider spreading it across two tax years to avoid jumping into a higher band.

The Risks of Drawdown

Running Out of Money

If you withdraw too much or your investments perform poorly, your pot can be depleted. A common sustainable withdrawal rate is 3.5-4% per year of your pot value.

Investment Volatility

Your pot remains invested, which means it can fall in value as well as rise. Withdrawing during a market downturn can lock in losses. Having a cash buffer within your drawdown (1-2 years of planned withdrawals in cash) helps you avoid selling investments at a bad time.

Inflation

If your withdrawals do not increase with inflation, your purchasing power decreases over time. Plan for annual increases in your withdrawals.

Drawdown vs Annuity

| Feature | Drawdown | Annuity | |---------|----------|---------| | Flexibility | High — change withdrawals anytime | None — fixed once set up | | Guaranteed income | No | Yes — for life | | Investment risk | Yes — pot can rise or fall | No — insurer bears the risk | | Inheritance | Remaining pot passes to beneficiaries | Usually dies with you (unless joint) | | Management | Requires ongoing decisions | Set and forget |

Many people use a combination: drawdown for flexibility early in retirement, with an annuity purchased later (perhaps at 75) for guaranteed income.

Getting Started with Drawdown

1. Check your pension provider offers drawdown (most modern SIPPs and personal pensions do)
2. Decide how much tax-free cash to take upfront
3. Set your initial withdrawal level
4. Review your withdrawal rate annually
5. Monitor your pot's investment performance

Understanding your other income sources (State Pension, ISA savings, any remaining business income) helps you determine the right drawdown level. Accounted can help you track income across sources.

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Retire on your terms with flexible drawdown. Sign up for Accounted and let Penny help you understand your income throughout your career — and beyond.