🇬🇧 UK

Should I move cash before pension drawdown?

Looking for US rules? → US 401(k) & IRA limits

UKPublished 6 October 2026 · Written by BuyMeWhiskey Editorial Team · How we check facts

Moving a pension from cash to investments before drawdown is not automatically right or wrong. The key is to match near-term withdrawals with a suitable cash reserve, keep longer-term money appropriately invested, and check tax and MPAA consequences before taking flexible income.

Next question: Should you put extra money into a pension or savings? →

Before starting flexible drawdown, book a free Pension Wise appointment through MoneyHelper to compare your options and the tax effects.

Book a free Pension Wise appointment

Run your own numbers: Compound interest and savings calculator.

Cash inside a pension is still part of the retirement plan

Moving a pension from cash to investments is not the same decision as starting drawdown. You can take pension benefits and leave the rest invested, subject to the options your provider offers. The core choice is how much certainty you need for near-term spending versus how much market risk you are willing to accept for money that will not be spent soon.

GOV.UK says you can usually take up to 25% of a pension as tax-free cash, subject to the Lump Sum Allowance, normally £268,275. The remaining withdrawals are usually taxable as pension income.

What flexi-access drawdown actually does

In flexi-access drawdown, money stays invested and you decide how much to withdraw. There is no general maximum withdrawal limit for a modern flexi-access drawdown fund. That flexibility can be useful, but it also means the balance can fall after withdrawals if investments perform badly.

Drawing down a large amount after a market fall can create sequence-of-returns risk: you sell investments while their value is down and leave less money in the portfolio to participate in a later recovery. That is why a short-term spending reserve can be useful even when the long-term pension remains invested.

Working while drawing a pension

Being employed does not stop you taking a personal pension once you are old enough under the scheme rules. But taxable pension income is added to other taxable income for Income Tax. For 2026/27 the standard Personal Allowance is £12,570, and the basic-rate band for England, Wales and Northern Ireland is £37,700 above allowances.

The other major issue is pension contributions. If you flexibly access a defined contribution pension, the money purchase annual allowance is £10,000 in 2026/27. This can sharply reduce the amount of new defined contribution saving that can receive tax relief after a trigger event, so taking a small taxable withdrawal simply because you can may have a long-term consequence for someone who is still contributing heavily.

A practical way to split the pot

Many people do not need to choose between "all cash" and "all invested". A pension can be divided mentally into a near-term spending bucket and a longer-term growth bucket. The near-term part can help pay the next few years of planned withdrawals without forcing sales after a market fall. The longer-term part can remain invested according to the person's tolerance for risk and time horizon.

This is a planning framework, not a promised withdrawal rate. The right split depends on essential spending, other guaranteed income, State Pension timing, health, tax position and the pension's investment choices and charges.

State Pension timing changes the picture

State Pension age is not one universal birthday for everyone. The government timetable has the State Pension age rising from 66 to 67 between 2026 and 2028. Your exact age depends on your date of birth, so check the official forecast rather than using a headline age.

If State Pension income is starting next year, the private pension may only need to bridge the gap until then. That can favour a more conservative near-term plan than someone who expects to depend on the private pension for decades.

Be clear about the 25% tax-free rule

The tax-free amount is usually up to 25% of the amount being crystallised, subject to the individual's available Lump Sum Allowance. You do not have to take all the tax-free cash in one go. Different methods of taking benefits can create different tax patterns, so a provider's quote is worth checking before a large first withdrawal.

Use the free guidance before a major decision

MoneyHelper's Pension Wise service provides free government guidance for eligible people with defined contribution pensions. It can help explain the options and the tax consequences. A regulated adviser is a separate service and may charge for advice, especially where the decision involves a large portfolio or several pension schemes.

Worked example

Illustrative example: Jordan is still working and has a £120,000 personal pension. Jordan is considering drawdown next year but wants to understand the tax effect of taking some cash while continuing to earn a salary.

Assume Jordan crystallises the full illustrative £120,000 pot and has enough Lump Sum Allowance available. The usual 25% tax-free portion is £120,000 × 25% = £30,000.
The remaining pension is £120,000 − £30,000 = £90,000.
Suppose Jordan takes an illustrative £6,000 taxable drawdown payment during 2026/27 and has £10,000 of other taxable pension income.
Total taxable income from those pension sources would be £6,000 + £10,000 = £16,000.
After the £12,570 Personal Allowance, taxable income would be £16,000 − £12,570 = £3,430.
At 20% basic rate, the illustrative Income Tax on that £3,430 would be £3,430 × 20% = £686.

This example ignores Jordan's salary and any other taxable income, so the actual tax could be higher. It also does not model investment returns, which can be positive or negative.

Should I move my pension from cash to investments before drawdown?#

Not automatically. Cash reduces investment volatility but can lose purchasing power over time, while investing creates market risk. A useful test is how much money you expect to spend soon and how much can stay invested for later years without needing to sell after a market fall.

Can I take a 25% tax-free lump sum and leave the rest invested?#

Yes, that is a common way of accessing a defined contribution pension. You can usually take up to 25% tax free, subject to your available Lump Sum Allowance, and leave the remaining pension invested in drawdown or another permitted option.

Does pension drawdown affect the money purchase annual allowance?#

A taxable flexible withdrawal can trigger the £10,000 money purchase annual allowance in 2026/27. That matters mainly to someone who continues paying into defined contribution pensions, because further contributions above the MPAA can create an annual-allowance tax issue. That allowance matters especially when someone expects to keep contributing to a defined contribution pension after starting flexible withdrawals.

Can I draw a pension while still working?#

Yes, provided you have reached the relevant pension access age and the scheme permits access. The taxable pension income is added to other taxable income for Income Tax, so the extra pension payment can push part of your income into a higher band.

How much should I keep in cash for retirement?#

There is no government-prescribed cash percentage. The useful question is how many near-term withdrawals you want to fund without selling investments in a poor market. A larger cash reserve can reduce sequence risk, but holding too much cash can also reduce long-term growth potential.

When should I use Pension Wise?#

Pension Wise is useful before taking flexible benefits from a defined contribution pension, particularly when you are comparing drawdown, annuity and lump-sum options. MoneyHelper provides the service as free government guidance, separate from paid financial advice. That allowance matters especially when someone expects to keep contributing to a defined contribution pension after starting flexible withdrawals.

Does State Pension age matter if I plan to draw down next year?#

Yes. The State Pension can provide a later income stream that reduces the amount your private pension needs to supply. The State Pension age is rising from 66 to 67 between 2026 and 2028, so check your exact date rather than relying on a general age.

Keep reading

Next question →Should you put extra money into a pension or savings?

Sources

Figures were checked against these sources before publication. If a rule changes, we update the page and show the new date.

General information, not personal financial advice. Rules depend on your circumstances; check the official source or speak to a regulated adviser before acting.