The problem changes shape at retirement
Accumulating wealth is forgiving: crashes while you’re saving are just cheap buying opportunities. Spending from a portfolio is not forgiving. Withdrawals in a downturn sell more units at depressed prices, permanently shrinking the pot — so two retirees with identical average returns can end up in wildly different places depending purely on the order in which good and bad years arrive. This is sequence-of-returns risk, and managing it is most of what a drawdown strategy is.
How much can you take?
The famous “4% rule” (from the US Trinity study): withdraw 4% of the starting pot in year one, raise it with inflation each year, and a 50–75% equity portfolio has historically survived 30 years. It’s a useful anchor and a decent sanity check — £500,000 supports roughly £20,000 a year plus State Pension — but treat it as a planning tool, not a guarantee: it’s based on US historical returns, 30 years exactly, and no fees.
In practice, flexibility beats any fixed rule. Approaches that materially improve survival odds:
- Start nearer 3–3.5% if retiring early, markets look expensive, or fees are above rock-bottom.
- Guardrails: skip the inflation rise (or trim spending ~10%) after a bad year; allow rises after strong runs. Small, rare adjustments buy dramatic improvements in how long money lasts.
- Spend from the right pocket: hold 1–3 years of spending in cash and short-dated bonds, refilled in good years. In a crash you spend the buffer instead of selling shares cheaply — this is the single most practical defence against sequence risk (and why the diversification guide matters double in retirement).
Remember the State Pension (currently around £12,000 a year from age 66–67, triple-locked) is the bedrock — inflation-proof income for life. Check your forecast and fill any National Insurance gaps: buying missing years is often the best-returning “investment” available in the UK — the State Pension guide walks through it.
The UK tax mechanics
A defined-contribution pension pays out as: 25% tax-free (up to a lifetime cap of £268,275), with the rest taxed as income when withdrawn. That creates real planning levers:
- Use the personal allowance every year. £12,570 of taxable pension withdrawals costs £0 in tax (less once State Pension fills the allowance). Skipping withdrawals in early retirement can waste allowance years.
- Phase the tax-free cash rather than taking it all at once (“drip” via drawdown or UFPLS withdrawals, each 25% tax-free / 75% taxable), keeping more compounding inside the wrapper.
- Blend wrappers. ISA withdrawals are tax-free, so pairing taxable pension income up to a band boundary with ISA top-ups above it keeps your rate low. This is where pre-retirement ISA building pays off.
- Mind the traps: flexibly accessing taxable pension money triggers the MPAA, cutting future pension contributions to £10,000 a year (see the pension tax relief guide) — relevant if you might return to work. Large single withdrawals can also spike you into higher bands and emergency tax codes.
- Inheritance changes the ordering. From 6 April 2027, unused pension pots count in your estate for inheritance tax — the old “spend ISAs first, preserve the pension to pass on” logic no longer holds for estates likely to pay it. If yours might, the withdrawal order above needs a second pass: the pensions and inheritance tax guide covers what changed and the options.
Annuities deserve a second look
Annuities — guaranteed income for life in exchange for capital — were dismissed for a decade of low rates, but pricing has improved substantially. Covering your essential spending with State Pension plus an annuity slice, then drawing flexibly from investments for the rest, removes the nightmare scenario (outliving the money) while keeping upside. Retirement income isn’t a religion; blending approaches is usually the strongest answer. The annuities guide covers the choices — single vs joint life, level vs escalating, enhanced rates for health conditions — and how to shop quotes properly.
The one-line summary
Start around 3.5–4%, stay flexible, keep a cash buffer so crashes never force sales, drain the personal allowance every year, phase the tax-free cash, and let the State Pension (topped up if needed) carry the floor. The goal isn’t maximum income — it’s income that cannot run out.
Related guides & tools
- Annuities — buying the guaranteed floor that makes flexible drawdown safer
- Pensions and inheritance tax — the April 2027 change that rewrites the withdrawal-ordering logic
- State Pension and your NI record — securing the inflation-proof floor first
- Pension tax relief — the MPAA and the allowances that shape withdrawals
- Building a diversified portfolio — the bond and cash layers that absorb bad years
- Accumulation funds — when switching to income units turns the portfolio into cash flow
- Financial Planner — model whether the pot supports the income you want
Last reviewed: August 2026.