Too Much, Too Soon? Managing Income in Flexi-Access Drawdown

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.

All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.

There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.

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For those reaching retirement with defined contribution pension pots, flexi-access drawdown offers flexibility and freedom. You’re no longer restricted to purchasing an annuity or taking just a limited income. Instead, you can tailor withdrawals to your lifestyle and retirement goals.

But this freedom also comes with responsibility. A common risk can be taking too much, too soon – something we refer to as the ‘Bamboo Trap’. Much like a bamboo plant that grows quickly and hollows out from the inside, a pension pot drawn too aggressively may flourish initially, only to collapse unexpectedly.

Let’s explore how flexi-access drawdown works, what the common pitfalls are, and how to use it responsibly so your pension can support you for life.

What Is Flexi-Access Drawdown?

Introduced in 2015 as part of the Pension Freedoms legislation, flexi-access drawdown allows individuals over the age of 55 (rising to 57 in 2028) to access their defined contribution pension pots flexibly.

Typically, you can:

• Take up to 25% of the fund tax-free (either in one go or as part of a phased approach)

• Keep the remaining 75% invested

• Draw income or lump sums as and when needed

• Adjust your income over time according to lifestyle or tax needs

It’s the most common way for retirees to access their pensions, but one that requires careful management.

The Bamboo Trap: What Does It Mean?

The Bamboo Trap refers to a behavioural pattern where individuals:

• Start drawdown at a relatively young age (e.g. mid-50/early 60s)

• Withdraw income at a rate that seems sustainable in the short term

• Do not factor in longevity, inflation, market volatility or future lifestyle needs

Like bamboo, the pension fund may appear to grow or hold steady for several years. However, behind the scenes, drawdown plus market fluctuations may be depleting the core. If left unchecked, this may lead to a situation in your 70s or 80s where your pension pot runs dry, leaving you reliant solely on the State Pension or other savings and assets to meet your income requirements.

The Role of Sustainable Withdrawal Rates

One of the most widely debated aspects of drawdown is what constitutes a ‘safe’ level of income.

There is no universal figure. We often meet clients who refer to the 4% rule, originally derived from US research suggesting that withdrawing 4% per year (adjusted for inflation) gives a high probability of sustaining a portfolio for 30 years. However, we do not believe this one-size-fits-all approach is suitable, and its data was based on US market conditions not the UK.

Factors that affect safe withdrawal rates:

• Market returns: A poor run of returns early in retirement (known as sequencing risk) can be damaging

• Longevity: Living longer means your fund must last longer

• Charges: High product or fund charges can eat into returns

• Lifestyle: Flexible spending needs are rarely linear; early retirement often involves more discretionary spending

It’s often more appropriate to take a dynamic approach to withdrawals, flexing them up or down based on market conditions and personal needs.

Responsible Drawdown: Practical Tip

If you’re considering or already using flexi-access drawdown, here are some principles to help avoid the Bamboo Trap:

1. Start with a plan, not just a product

Map out your likely income needs year by year. Factor in the timing of State Pension, other assets, care costs and one-off expenses. Your drawdown strategy should reflect your personal goals and cashflow

2. Revisit your plan regularly

Drawdown isn’t a ‘set and forget’ solution. Review your income annually and adjust for investment returns, lifestyle changes or tax legislation.

3. Build in buffers

Consider keeping a sufficient cash reserve either personally or within the pension to avoid selling investments when markets are down.

4. Beware of triggering the Money Purchase Annual Allowance (MPAA)

Once you start taking taxable income from your pension, your annual pension contribution allowance may drop from £60,000 to £10,000. This can limit future saving flexibility.

5. Stay tax-aware

Drawdown income is taxed as earned income. Taking too much in a single year could push you into a higher tax band unnecessarily. Use your personal allowance wisely and consider spreading withdrawals across tax years.

6. Review investment strategy

Is your pension still invested appropriately for income drawdown? Many default pension funds are designed for accumulation, not decumulation.

Final Thoughts

Flexi-access drawdown is a powerful retirement tool, but like all financial freedoms, it demands discipline. A personalised strategy, ideally professionally structured by a financial planner, can help ensure your pension works throughout your retirement, not just the early years.

Avoiding the Bamboo Trap means thinking long-term, spending with purpose, and regularly reviewing your income in light of changing needs and markets.

If you’d like help modelling your future income or reviewing your current drawdown strategy, we’d be happy to assist.