How to withdraw your pension without running out of money

A successful approach begins with understanding your needs, the risks you face and how your plan may need to change over time.

The key thing here is that it’s not what you’ve got, it’s what you do with it that counts. Rather than focusing only on the size of your pension pot, consider how much income you are likely to need and how your spending may change throughout retirement.

First, it’s worth considering your overall retirement income position. This may include workplace pensions, private pensions, savings and investments in your name, and the State Pension. For some people, part of their income may come from defined benefit (DB) pensions, sometimes known as final salary or career average pensions, which typically provide a guaranteed income for life. Others may have defined contribution (DC) pensions, where the value of the pension depends on the contributions made and how the underlying investments perform. Many retirees have a combination of both.

Your retirement age costs may vary depending on your circumstances. For example, travel, hobbies and supporting family members could mean higher spending in the early years, while healthcare or care costs may come to the fore in later years.

One place to start is by separating essential spending such as household bills and regular commitments from discretionary spending. It can also be helpful to understand how much of your essential spending is already covered by guaranteed sources of income, such as the State Pension or a defined benefit pension, and how much may need to come from savings, investments or defined contribution pensions. From there, you can assess the wider goals for how you can maximise your pension to match your needs. That’s where a well-constructed financial plan could help bring these different elements together.

Not every retirement income strategy involves withdrawing money from an invested pension. Some people may receive a guaranteed income from a defined benefit pension or an annuity, while others may combine these sources with withdrawals from defined contribution pensions, savings and investments.

Of course, there is no single withdrawal rate that works for everyone. It will depend on factors such as pension size, other income, and your long-term investment approach.

For many people with defined contribution (DC) pensions, where the value of the pension is built up through contributions and investment growth, drawdown provides flexibility by allowing money to remain invested while withdrawals are taken over time. In the UK, most people can withdraw up to 25% of their DC pots as a tax-free sum from age 55 (57 from April 2028). For many people, even if they wait until State Pension age to do this, it can be a useful way to fund a mortgage pay-off, children’s weddings or a trip-of-a-lifetime holiday. 

Nonetheless, taking too much too early could create challenges later in retirement, particularly if markets fall soon after withdrawals begin. Taking a measured approach and reviewing withdrawals regularly may help balance enjoying retirement today with maintaining financial security for the future.

Some retirees choose to take a regular income, while others prefer to withdraw money when they need it. The most suitable approach will depend on where your retirement income comes from and whether you have other sources of guaranteed income alongside your pension savings. Phased withdrawals could also provide flexibility by moving money into drawdown gradually rather than accessing the entire pension at once. 

It’s worth bearing in mind, that the returns from pensions and investments can vary. Their value isn’t guaranteed, can go down as well as up, and may end up being less than you originally paid in.

Changes coming into effect from April 2027 mean pension planning will also need to consider estate planning. The government has confirmed that most unused pension funds and death benefits will be brought within the scope of inheritance tax from 6 April 2027.

For people who previously viewed pensions primarily as a way of passing wealth to future generations, this may change how they think about withdrawals and wider financial planning.

The right approach will depend on individual circumstances. Some people may want to use pension savings during their lifetime, while others may need to review how pensions fit alongside other assets when considering inheritance plans.

Careful groundwork isn’t the only factor in play, and even the most meticulously planned retirement strategy needs to account for uncertainty.

Investment markets can move significantly over short periods, creating challenges if withdrawals are being made while investments have fallen in value. The timing of investment returns can have a major impact when you are regularly taking money from your pension.

Inflation is also a key consideration. A retirement income that feels comfortable today may have less spending power in the future if prices continue to rise. 

Another risk that could have a net-negative effect is longevity. People are living longer, which means retirement savings may need to support several decades of income. So, planning early for the likelihood of a longer retirement may reduce the risk of needing to make difficult financial decisions later if money gets tight. 

Your personal circumstances, priorities, spending needs, tax rules and the wider economic environment are likely to change throughout your retirement, so your pension strategy may need to change too. 

Regular reviews can help assess whether your withdrawals remain sustainable, whether your investments still match your objectives and whether changes in tax rules or personal circumstances require adjustments.

Having a flexible retirement plan allows you to respond to life as it happens, while keeping adequate cash reserves. Building a strategy that supports the retirement you want, while giving your pension the best chance of lasting throughout your lifetime.

Speak to one of our advisers today to understand how your savings can support your retirement. You can book a free, no obligation call with one of our team today. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan. 

This article is for information purposes only. It is not intended as financial advice. 

This article refers to third party sources which we believe to be true and accurate. 

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