How To Calculate The Right Amount To Withdraw From Your Pension

Deciding how much to withdraw from your pension can be challenging. It can be hard to balance enjoying your hard-earned retirement to the fullest while making sure you’re keeping enough money in reserve to last your entire retirement and cover any unexpected costs.  

When planning to withdraw funds, there are other factors to consider, too – including inflation, tax implications and investment risks. Plus, there’s the fact that the pensions landscape can suddenly change, as the recent Spring Budget proved beyond all doubt.

The Chancellor’s Budget introduced various new pension incentives for higher earners – including scrapping the lifetime allowance and raising the annual and money purchase allowances – but plans to cap the tax-free lump sum at £268,275 tempered the positivity somewhat.

In this article, Hilltop will talk you through the complexities of pension withdrawals. If you are thinking of taking a pension lump-sum or nearing retirement, this handy guide is a must-read if you are thinking about withdrawing money from your pension.

How Much Money Can I Withdraw From My Pension?

You’ll find plenty of suggestions online about “safe” amounts to take out of a pension annually to ensure your funds don’t run out. Some experts might recommend as much as 5% a year, while others may suggest a more conservative approach of less than 2%. However, there isn’t a one-size-fits-all solution. How much you can withdraw from your pension is highly subjective and will depend on your circumstances.

The optimal amount to withdraw from your pension will depend on several factors, including the size of your pension pot, your retirement goals and your financial needs. Withdrawing too little may leave you short to enjoy your retirement, while withdrawing too much can lead to unexpected tax liabilities and the risk of running out of money later in life. So calculating the right amount to withdraw from your pension is essential.

What Should I Consider When Withdrawing From My Pension?

Here are some of the main factors you should consider when planning to withdraw funds from your pension:

  • Your life expectancy: The amount you withdraw should be tailored to your anticipated lifespan (most people underestimate how long they will live) so that it will last throughout your retirement.


  • Your desired lifestyle: How much you need to withdraw will also depend on the type of lifestyle you wish to maintain. Do you plan to enjoy luxuries, like new cars and regular holidays, or are you the frugal type?


  • Inflation: As prices for goods and services rise, your withdrawals should be adjusted accordingly. This past year alone has demonstrated the need to have enough funds in reserve to cope with rising living costs.


  • Tax implications: Any taxable income beyond the annual £12,570 personal allowance is subject to income tax. Careful planning is necessary to ensure your withdrawals do not lead to an overly large tax bill.


  • Other sources of income: income from sources including investments, property or other pensions all contribute to your taxable income, so keep this in mind when deciding how much to withdraw.


How Should I Determine My Retirement And Lifestyle Goals While Ensuring My Expenses Are Met?

It is important to assess your current income and expenditure and any other sources of income that you may have. Establishing these parameters will help you to determine the type of lifestyle you wish to maintain in retirement and how much you need to withdraw from your pension to meet these goals.

It’s also helpful to review your pension contributions and find out how much you have saved since you started making payments. This will enable you to calculate the amount of money you should withdraw from your pension to ensure that it will meet your expectations and last throughout your retirement.

What Are The Different Pension Withdrawal Options? 

Thanks to the pension freedoms that came into effect in 2015, British pensioners now have more flexibility than ever over how they access their pension funds. As such, there are several pension withdrawal options available to UK pensioners, including the following:

  • Lump sums – This is where you take a single payment or several smaller payments from your pension. These can be used to fund major purchases, such as a house or car. 


  • Drawdown – This is where you take regular payments from your pension, while the remainder stays invested. 


  • Annuities – These are long-term contracts that guarantee a regular income, normally for the duration of your retirement. 

Understanding the differences between these pension withdrawal options is important, as this will help you decide which one is right for you. Of course, if you are still unsure about the best course of action, speaking with a regulated financial adviser can give you the clarity you need to make an informed decision. 

What Is The Difference Between Flexible Income And Lump Sums?

Flexible income – or pension drawdown – is when you withdraw regular payments from your pension over a period of time whilst keeping the remainder of your funds invested. This approach can give added flexibility and freedom over how and when you access your money. 

Lump sums can either be a one-off payment or a series of smaller payments taken from your pension – perhaps to fund a large purchase.

Although both options can be beneficial in different ways, deciding which is right for you depends on the amount you wish to withdraw and how long you plan to live in retirement. It is also worth remembering that neither will give you a guaranteed income for life, unlike an annuity. As such, you could run out of money. In addition, both options involve keeping the remainder of your funds invested, which also comes with the risk of investments going up or down.

Will The Pension Tax-Free Lump Sum Be Scrapped?

Before Chancellor Jeremy Hunt’s Spring Budget, there was much talk of the pension tax-free lump sum being scrapped. One of the loudest voices favouring such a move was the Institute for Fiscal Studies (IFS). The think-tank reasoned that removing the long-standing 25% tax-free lump sum would create a more equitable system, especially for lower-income retirees.

While the Chancellor stopped short of scrapping the tax-free lump sum altogether, he did go as far as to cap it to £268,275 across the board. This figure amounts to 25% of the current lifetime allowance limit of £1,073,100 (set to be abolished in 2024). 

The upshot is that even though pension savers will soon be able to save as much money as they like into a pension without risking punitive charges, they can only access £268,275 of it tax-free. Moreover, with inflation, the value of that tax-free sum could realistically decrease in real terms moving forward. 

Get Pension Advice From Hilltop 

At Hilltop, we are here to help you make the most of your retirement. We have years of experience and expertise in pension drawdown  and helping those approaching retirement to calculate how much to withdraw from their pensions. We can help you to access your pension funds in the most effective and tax-efficient way to help you maximise your pension income and minimise your tax liabilities. Together, we can set you on the path to a happy retirement.

Here at Hilltop, we make pension advice personal. So for a secure and planned future, get ahead of the curve and start thinking about your future retirement income and how you might like to access it now. We offer bespoke and regulated pension advice for those looking to make the best decisions for tomorrow – today. With our help, a worry-free future may be just a phone call away. So speak to our experts today to find out how we can help you.

If you would like pension advice or to arrange a consultation, please contact us online or call us on 0161 413 7051.

Hilltop’s offices are open 9am to 5pm Monday to Thursday and 9am to 4pm on Fridays. Hilltop Financial Planning is authorised and regulated by the Financial Conduct Authority. Our advisers have over 100 years of combined experience and knowledge of working with people like you and helping them to make the most of their finances.

Important information: Our website offers information about investing and saving, but not personal advice. If you’re not sure which services are right for you, please request advice from Hilltop’s independent financial advisers. Remember that investments can go up and down in value, so you could get back less than you put in.

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