Drawdown - Explained

In drawdown your money stays invested and, hopefully, you take dividends, interest and capital gains out to spend. Some people look to spend as little of their original pension pot as possible so that it can be passed on to heirs or because they are very nervous of running out of money, while others spend some principal so they have a higher retirement income and hope to manage their account balance to be close to zero when they die......obviously that's hard to do as people don't know exactly when they'll die or the annual return they'll get from their investments. This is where annuities have some advantages as they give you a known level of income until the day you die. However, you pay for those guarantees and you might well get less income overall than with a well managed investment portfolio.

The key term to learn is 'crystallised'. You're pension funds start off 'uncrystallised' which basically means you still have the right to 25% tax free (also some tax advantages if you die before 75).
At any point post 55 (currently) you can opt to cyrstrallise part or all of your fund. At that point you take your 25% tax free and the other 75% becomes 'crystallised funds'. These stay sitting in the pension, invested as per your wishes, until you decide to take them out as taxable income. Try a couple of examples, assuming Personal Allowance is £12k for simplicity.
Example 1: All at once:
Start with £100k uncrystallised. Take the full 25% plus £12k of taxable income to use your PA. You end up with £63k of crystallised funds in the pension and £37k of cash in your pocket.
Example 2 Start with £100k and crystallise £16k per year. After first year you have £84k of uncrystallised funds and £16k in your pocket (25% of £16k = £4k tax free, £12k crystallised and drawn). Repeat each year until money gone. This method is know as UFPLS.

Prism wrote: »

I have not decided which method to use myself when I retire but I ask myself what I intend on doing with the 25% tax free lump sum should I use that method. Unless I come up with a good answer to that I assume flexi-access or UFPLS will be the better option (for tax purposes)

That depends on your circumstances. The advantage of flexi access is that growth on the uncrystallised funds is sheltered in the pension. That my be a good thing, but may not matter if you could get your full 25% shifted into ISAs pretty quickly anyway.
Cases where it might be a bad idea include where you are over the LTA, or where you need funds (eg to pay off a mortgage) but are still working and want to continue contributing.