Drawdown
How much can I safely take?
The 4% rule is the most repeated number in retirement planning and one of the least examined. Here's where it came from and why it may not be your number.
The 4% rule is the most repeated number in retirement planning and one of the least examined. Here's where it came from and why it may not be your number.
It comes from American research in the 1990s, looking at historical US market data. The finding: a retiree taking 4% of their initial pot, then increasing that amount with inflation each year, would not have run out over any historical thirty-year period.
That's a genuinely useful piece of work. It's also frequently repeated with none of its conditions attached — which is where it starts misleading people.
A thirty-year retirement. A specific mix of US shares and bonds. No fees. No tax. And crucially, that you keep taking the same real amount regardless of what markets do — which is not how any real person behaves.
Stop at 60 and plan to 95 and that's thirty-five years. The rule's safety margin was built for thirty, and the failure rate rises steeply as you extend it.
The original work assumed no costs at all. Real portfolios have them, and a percentage point of annual cost meaningfully reduces what's sustainable.
Taking 4% from a pension is not the same as receiving 4%. Income tax applies, and how much depends on your other income and which pot you draw from first.
Not a flaw in the rule, but it means applying 4% to your whole pot usually understates what you can take. Once £12,000 of inflation-linked income arrives, the amount you need from investments falls sharply.
There isn't a single safe rate. There's a rate that's safe for your circumstances, and four things move it.
The dominant factor. Twenty-five years and thirty-five years are very different problems.
Poor returns in the first few years of drawing do damage that good returns later cannot undo, because you sold units to live at the bottom. This is the real risk, and it isn't captured by any fixed percentage.
Someone who can cut spending 10% in a bad year can sustain a much higher starting rate than someone whose outgoings are fixed. Flexibility is worth more than most people realise.
State Pension, a defined benefit scheme, a rental income, a business sale. Every guaranteed pound reduces what the pot has to do.
Instead of “what percentage is safe?”, ask “what does taking this amount do to the age my money runs out?”
That's a question with an answer, and it's specific to you. It also reframes the decision usefully: you're not looking for a magic number, you're looking at a trade-off between what you spend now and how long it lasts. Most people, shown that trade-off directly, make a sensible decision quickly.
The free projection does exactly this — put in what you want to spend and it tells you the age it runs out. Try a few different figures and you'll find your own comfortable point faster than any rule of thumb will give it to you.
How much to take, and which pot to take it from, quickly becomes a regulated advice question. We can model what different approaches do to your projection. We cannot tell you which product to draw from or in what order — where that's the decision, we say so and can introduce you to Equity & General (FCA 474163), optional, with the commission disclosed beforehand.
Taking 4% and receiving 4% are different things, and the gap is where a lot of plans quietly go wrong. A worked shape, using today's rules.
Someone drawing £24,000 a year of taxable pension income and nothing else uses their £12,570 personal allowance first, then pays basic rate on the remainder. They keep roughly £21,700. The 4% they took was not the 4% they got to spend, and a projection that ignores this overstates their income by about a tenth.
The State Pension is taxable and it is paid without tax deducted, so its roughly £12,000 uses up almost the whole personal allowance. Every pound drawn from the pension on top is then taxed from the first pound rather than the £12,571st. Total income is higher, but the pot is doing less work, which is the effect that matters.
Up to 25% of a pot can normally come out free of income tax, capped by the lump sum allowance of £268,275. Money taken that way does not use up allowances or bands, which is why the sequence of what you draw and when changes the total tax bill across a retirement rather than just in one year.
Two people with identical pots and identical withdrawal rates can pay materially different tax, depending on other income, which pots they draw from, whether they are Scottish taxpayers, and what year it is relative to their State Pension age. No single percentage encodes that.
Incomplete rather than wrong. As a rough orientation for a thirty-year retirement funded entirely from a pot, it is a reasonable place to start a conversation. As your personal answer it leaves out tax, fees, your State Pension, how long the money actually has to last, and whether you have any ability to spend less in a bad year. Those are not small print. Between them they can move the sustainable figure a long way in either direction, and not always downwards: for somebody with a full State Pension and a modest defined benefit scheme, the amount the pot itself needs to produce is often far lower than a flat 4% of everything would suggest.
Both approaches exist and they behave very differently under pressure. A fixed real amount gives you a predictable income and puts the entire risk onto whether the pot lasts, so a bad decade shows up as the money running out earlier rather than as a smaller cheque. A percentage of the current value flexes with markets, which protects the pot but means your income falls in exactly the years you would least enjoy it falling. Which suits you depends mostly on how much of your spending is genuinely non-negotiable. Someone whose fixed costs are covered by guaranteed income can tolerate a flexing income comfortably. Someone drawing their entire cost of living from the pot cannot.
Whether to buy one, when, and from whom is a regulated product decision, and Buzz is not authorised to advise on it. What we can model is the effect. Converting part of a pot into a guaranteed income of a given size changes the projection in ways that are easy to see once they are on the page: the age the remaining money runs out, how much the plan depends on the first few years going well, and what is left at the end. Seeing that trade-off in your own numbers first means any conversation with an authorised adviser starts from a question you have already framed properly.
Very much, and for two separate reasons. The first is income tax, because what you draw and from where determines how much of your personal allowance and basic-rate band gets used in each year, and the differences compound across a long retirement. The second is inheritance tax on whatever is left, which changed materially with unused pension funds being brought into estates from April 2027. The Financial Plan can model different drawdown orders side by side and show you the difference in pounds and in years. Choosing between them for you would be advice on the merits, and that is where we stop and say so.
A poor run of returns in the first few years after you stop drawing. It does damage that later good years cannot repair, because units sold to live on at the bottom of a fall are gone and are not there to recover when the market does. The same three bad years arriving a decade later are absorbed comfortably by a pot that has had time to grow. This is also the reason a projection built on one flat growth rate can look far more reassuring than the plan deserves, and why the full version runs your numbers two thousand times with the order of those years reshuffled.
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