You’ve built up a pension pot — maybe in a SIPP, maybe a workplace scheme. You’re retiring, or thinking about it, and the million-pound question is: how much can you take out each year without running out of money?
This is where “withdrawal rates” come in. Get it wrong and you could be fine at 65 but broke at 85. Get it right, and you give yourself a sustainable income, and the freedom to actually enjoy your retirement.
The Famous “4% Rule”
Back in the 1990s, a US financial planner called Bill Bengen crunched decades of market data and came up with the “4% rule.” The idea: take out 4% of your pot in year one, then increase that amount each year with inflation, and in most cases your money should last 30 years.
So, £500,000 in your SIPP? That’s £20,000 in year one, £20,600 if inflation is 3% the next year, and so on. Simple.
But — and it’s a big but — that was based on historic US market data, not today’s UK reality.
Morningstar’s Updated Numbers
Morningstar, one of the big investment research firms, has re-run the numbers with today’s lower bond yields, market valuations, and inflation risks. Their conclusion: a safer starting rate is closer to 3.7%.
So that same £500,000 pot might support £18,500 a year rather than £20,000. Not a huge difference at first glance, but over 30 years it matters.
Bengen’s New Thinking
And just to complicate things, Bill Bengen himself has recently updated his research in A Richer Retirement. He argues that with better diversification — not just US large caps, but international stocks, small caps, and other assets — you might push the safe rate back up: maybe 4.5–5%.
But here’s the catch: that depends on markets doing their bit, you staying invested through the wobbles, and being flexible if things go wrong. It’s not a guarantee.
Why Asset Allocation Changes Everything
Your withdrawal rate isn’t just about the number you choose — it’s about how your pension pot is invested.
- Low-risk (cash/bonds heavy) → You’ll sleep well, but inflation will nibble away. Safer, yes, but likely closer to 3% sustainable.
- Balanced (50/50 mix of shares and bonds) → This is where the classic 4% figure comes from. A good middle ground.
- Growth-oriented (lots of shares, diversified globally) → More chance of keeping ahead of inflation and supporting 4.5–5%, but more volatility. You’ll need the guts to ride out downturns.
Remember: unless you’re buying an annuity, you don’t need to derisk your whole pot at retirement. Keep the money you’ll need in the next few years safe, but let the long-term money keep working in growth assets.
The Risks
- Sequence of returns risk: Bad luck if markets fall in your first few years of retirement. It hurts more than if they fall later.
- Inflation: If it spikes, your costs rise faster than your investments.
- Longevity: Living longer than expected means you need the money to last longer.
- Behaviour: If you panic-sell in a downturn, you’ll lock in losses and blow up the plan.
What To Do Next (Action Plan)
- Check your numbers. How big is your pot? What income do you need? Add in your State Pension (~£11,973 a year if you qualify for the full amount).
- Decide your starting rate. Around 3–3.5% if you want to be cautious, 4% if you’re average, 4.5% if you’ve got higher risk tolerance and flexibility.
- Match it with your investments. Near-term spending → safer assets (cash, short-term bonds). Long-term spending → growth (equities, diversified).
- Be flexible. If markets fall, tighten your belt for a bit. If they boom, you can spend a little more.
- Review every year. Retirement isn’t “set and forget.” Check inflation, check your pot, adjust as needed.
- Consider mixing strategies. Some people buy an annuity with part of their pot for security, and leave the rest invested for growth and flexibility.
Final Word
Don’t think of withdrawal rates as a magic formula — think of them as guardrails. They stop you careering off the motorway, but you still need to keep your hands on the wheel.
So yes, the 4% rule is a decent starting point, but in today’s world, 3.5–4% is safer. More than that? Possible, but only if you can stomach risk and cut back in bad years.
Retirement is about living — not just surviving — so plan cautiously, spend wisely, and give yourself the freedom to enjoy it without sleepless nights.r current pension / SIPP (using your numbers) with different asset allocations, so you can see what “safe” looks like for you.
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