As you move toward retirement, deciding how to turn your pension into income is one of the most important financial choices you'll make. Martin Lewis (the MoneySaving Expert) has long highlighted that pension drawdown can be a flexible way to take retirement income, but that it also comes with risks. In this guide, we break down Martin's tips, explain key concepts in plain English, and outline alternatives so you can make informed decisions about your future income.
Pension Drawdown – Martin Lewis' Key Takeaways
✓ Drawdown = flexibility but requires careful planning.
✓ 25% tax-free lump sum still applies—plan withdrawals for tax efficiency.
✓ Mixing annuity and drawdown offers security and freedom.
✓ Review investments, charges, and rules regularly.
✓ Use free guidance and consider paid advice for complex cases.
Pensions and Tax: Martin Lewis' Swiss Roll Analogy
Martin Lewis compares your pension to a Swiss roll cake to explain tax: The jam is your tax-free money (25%), and the sponge is the taxable money (75%). When you take a slice (i.e. drawdown) you always get jam and sponge together; you can't just scrape out the jam. This means every withdrawal after your initial tax-free lump sum is a mix of tax-free and taxable money. Taking smaller slices over time across different tax years can help you stay in a lower tax bracket.
Comparing Pension Annuity vs. Pension Drawdown
| Feature |
Annuity |
Drawdown |
| What it is |
You swap some or all of your pension pot for a guaranteed income for life. |
You keep your pension invested and take money out when you need it. |
| Income security |
Fixed income that can't run out (unless you choose a short-term annuity). |
Flexible, but you could run out of money if withdrawals or investments go wrong. |
| Flexibility |
Very little: you're locked into the deal once set up. |
High: You decide how much and when to withdraw. |
| Tax treatment |
25% of the pot can be tax-free upfront; the rest is taxed as income. |
Same—25% tax-free allowance, rest taxed when you withdraw. |
| Investment risk |
None—you hand the risk to the insurer. |
You carry the risk—your pot stays in the market, which goes up and down. |
| Changing providers |
Hard or impossible once purchased. |
Easier: you can move to another drawdown provider. |
| Best for |
People who value certainty and don't want to manage investments. |
People comfortable with managing risk and wanting flexibility. |
Note: It doesn't have to be an either/or decision; you can mix annuity and drawdown. Many use an annuity for essential income and keep a portion in a drawdown for flexibility.
Example: John uses part of his pot for an annuity to cover bills and keeps the rest in a drawdown for holidays or emergencies.
Guidance & Advice: You can get free help from Pension Wise (via MoneyHelper). If you have a larger pot or complex needs, regulated advice is worth considering. Pension Wise offers free, impartial guidance to help you understand your options, but it won't recommend specific products—for personalised recommendations, you'll need paid regulated advice from a qualified adviser.
Customer Example: The Impact of Higher Annuity Rates
This table shows the difference a high annuity rate can make. The same customer with the same pension pot would receive £1,585 more with today's rates.
| Scenario |
Year |
Pension Pot |
Tax-Free Cash (25%) |
Amount Used to Buy Annuity |
Annual Income |
Change vs 2022 |
| 65-year-old retiree |
January 2022 |
£78,500 |
£19,625 |
£58,875 |
£2,914 |
— |
| Same customer |
May 2025 |
£78,500 |
£19,625 |
£58,875 |
£4,499 |
+54% / +£1,585 |
Notes:
- Figures are based on best available annuity rates at each date (source: MoneyHelper annuity tracking, May 2025).
- Assumes a single-life, level annuity after taking 25% tax-free lump sum.
- Actual income will vary depending on age, health, annuity type, and provider.
Important: Like interest rates, annuity rates fluctuate over any given period of time. So when applying for an annuity, it's worth getting a new quote at the last minute to ensure you're getting the best rate possible.
In Summary
Pension drawdown offers flexibility and control, but you need to plan carefully. Martin Lewis stresses the importance of spreading withdrawals, monitoring pension fund investments, and mixing the flexibility of drawdown with the certainties of annuities. Before making big decisions about your pensions, it is always worth either seeking general guidance or tailored regulated advice to help avoid costly mistakes. Ultimately, the best choice depends on your finances, goals, and comfort with risk.