Pension drawdown has given retirees more freedom than ever before. Instead of swapping your pension for a fixed annuity income, you can leave your money invested and take what you need, when you need it.
That freedom is a big part of drawdown’s appeal. It also means you carry the risk. With an annuity, the insurer worries about markets and life expectancy. With drawdown, those worries become yours and so do the consequences of getting your pension drawdown strategy wrong.
The tricky part is that mistakes rarely show up straight away. A plan that looks perfectly sensible at 60 can quietly cause problems that only surface at 75 or 85, when there’s far less time to put things right.
At Resolve Financial Solutions, we help people plan and review their retirement income every day. Here are the six most common drawdown mistakes we see, what can happen as a result, and how to avoid them:
- How withdrawing too much, too early can run your pension dry
- Why the timing of market falls matters so much in retirement
- How tax-free cash, tax bands and emergency tax codes can catch you out
- What the Money Purchase Annual Allowance is and how it’s triggered
- Why the April 2027 inheritance tax change means many drawdown plans need a fresh look
Mistake 1: Drawing too much, too early
The most obvious risk with drawdown is running out of money. Spending more in your early retirement years is completely reasonable. The problem comes when withdrawals are set at a level the pension simply can’t sustain.
If you take out more than your investments grow by year after year, the pot shrinks. And as it shrinks, each withdrawal becomes a bigger percentage of what’s left, which speeds up the decline.
How to avoid it: Base your withdrawals on a realistic plan rather than a gut feeling. That means thinking about how long your money may need to last (it could easily be 30 years or more), what other income you’ll have, such as the State Pension, and how much flexibility you have to cut back in leaner years. Cashflow modelling, which projects your income and spending over your lifetime under different scenarios, can show whether your planned withdrawals are sustainable.
Mistake 2: Ignoring sequence-of-returns risk
Sequence-of-returns risk is the danger that markets fall in the early years of your retirement while you’re also taking money out. When you’re still working and saving, a market fall can be an opportunity, as you’re buying investments at lower prices. In drawdown, it works the other way. To produce the same income, you must sell more units at lower prices. Those units are gone for good, and they won’t benefit when markets recover.
Two people can earn the same average return over 20 years and end up with very different outcomes, simply because of the order in which the good and bad years arrived.
How to avoid it: Many drawdown strategies hold a cash reserve, often enough to cover one to two years of income. You draw from this during market downturns rather than selling investments at a low point. Making sure your investments match your risk tolerance and timescale also matters, as does being prepared to reduce withdrawals temporarily if markets fall sharply.
Mistake 3: Taking all your tax-free cash without a plan
Most people can take up to 25% of their pension tax-free, subject to an overall Lump Sum Allowance of £268,275 across all their pensions (higher if you hold certain protections). It’s tempting to take the full amount on day one, and for some people, perhaps to clear a mortgage, that’s the right decision.
But taking it all at once isn’t always the best move. If the money ends up sitting in a bank account earning less than inflation, it loses value in real terms. If it’s not needed straight away, you’ve also moved it out of a tax-efficient pension wrapper into your estate.
How to avoid it: Have a clear purpose for any tax-free cash you take. One alternative is phased drawdown, where you access your pension in stages so that each withdrawal includes a tax-free element. This can help you manage your income tax position year by year. The right approach depends on what you need the money for, your tax position and your wider plans.
Mistake 4: Triggering an unexpected tax bill
Beyond the tax-free portion, pension withdrawals are taxed as income. They’re added to any other income you have that year, including the State Pension, earnings or rental income. A large one-off withdrawal can easily push you into the higher-rate or even additional-rate tax band, meaning you lose far more in tax than you expected.
There’s also the problem of emergency tax. When you make your first taxable withdrawal, your pension provider often doesn’t have an up-to-date tax code for you. It may apply an emergency code that assumes you’ll receive the same amount every month for the rest of the tax year. The result can be a significant overpayment of tax. You can reclaim it from HMRC, but that takes time and paperwork.
How to avoid it: Plan withdrawals across tax years so you make the most of your Personal Allowance and lower tax bands. Rather than one large withdrawal, a series of smaller ones over several years is often far more tax efficient. If you do need to make a big withdrawal, get advice on the timing first.
Mistake 5: Accidentally triggering the Money Purchase Annual Allowance
Many people now start drawing on their pension while still working. If that’s you, watch out: once you take taxable income from a flexi-access drawdown plan, or take a lump sum that includes taxable money, the Money Purchase Annual Allowance (MPAA) is triggered. This cuts the amount you can pay into money purchase pensions each year with tax relief from the standard £60,000 to just £10,000. Once triggered, it can’t be reversed.
For someone who planned to keep building their pension, perhaps with employer contributions or by making large contributions in the run-up to full retirement, this can be an expensive surprise.
How to avoid it: Taking only your tax-free cash doesn’t usually trigger the MPAA, but taking any taxable income does. If you’re still contributing to a pension, check whether a withdrawal will trigger the MPAA before you make it, and consider whether you can fund your needs from other sources in the meantime.
Mistake 6: Not adapting to the April 2027 inheritance tax change
For years, a popular approach has been to spend other savings first and leave the pension untouched, because unused pension funds generally sat outside your estate for inheritance tax (IHT) purposes. That’s changing. Under the Finance Act 2026, most unused pension funds and pension death benefits will be included in your estate for IHT for deaths on or after 6 April 2027.
This could mean a significant tax bill for your family if your estate is above the IHT thresholds. If you die after age 75, your beneficiaries may also pay income tax on what they withdraw from an inherited pension. Relief is available so the same money isn’t fully taxed twice, but the combined tax cost can still be substantial.
How to avoid it: Don’t panic, and don’t rush into large withdrawals that could create a big income tax bill of their own. Instead, review your plan in the light of the new rules.
Questions worth exploring with an adviser include:
- In what order should you draw on your pension, ISAs and other savings from now on?
- Is your pension expression of wish (nomination) up to date?
- Does your pension scheme allow beneficiaries to take inherited funds as drawdown, which may be more tax-efficient than a lump sum?
- Would gifting from surplus income, or life insurance written in trust, help your family?
Remember, gifts to a spouse or civil partner are generally still exempt from IHT, and pensions remain one of the most tax-efficient ways to save for retirement. The rules haven’t made pensions bad. They’ve changed what a good drawdown strategy looks like.
Your drawdown strategy needs regular reviews
The biggest mistake of all is treating drawdown as a one-off decision. Your pension drawdown strategy needs to adapt as markets move, tax rules change, your health and spending evolve, and your priorities for your family shift.
If you’re already in drawdown or approaching retirement, now is an ideal time for a review, especially with the inheritance tax changes less than six months away.
Book your free initial consultation
At Resolve Financial Solutions, we’ll look at your whole financial picture and help you build a drawdown strategy that gives you the income you need, manages tax efficiently and protects what you want to pass on.
Book a free initial consultation with our team today and let’s make sure your pension works as hard for you in retirement as you did to build it.
*Please note: The information in this article is based on our understanding of current legislation and HMRC practice as of October 2026. It is for general information only and does not constitute financial advice. You should seek personalised advice before making any decisions about your pension.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. The Financial Conduct Authority does not regulate tax and estate planning.
The information contained within this article was accurate at the date of publication and is subject to change. There can be no guarantee the information will continue to be accurate in the future.