The so-called “4% rule” of sustainable pension withdrawals was first suggested in the mid-1990s. Crucially, it failed to consider individual circumstances and the wider economy, so the “rule” is better viewed as a guide.

More pensioners than ever are currently withdrawing funds at potentially unsustainable levels, due in part to the chancellor’s recent decision to bring unused pensions into the scope of Inheritance Tax (IHT) from 2027.

In fact, according to FCA figures published by MoneyWeek, 45% of all pension pots were withdrawn at a rate of 8% or over in 2024/25 (the highest proportion ever recorded).

Keep reading to find out why this might be unsustainable and how to manage your withdrawals tax-efficiently while ensuring you don’t run out of money when you need it most.

1. Keep an easy access emergency fund, but don’t hold too much in cash

Even if you’re managing your pension fund sustainably and sensibly, the unexpected can still strike. That’s why your first line of defence should always be an emergency fund. The cash equivalent of around six months of household expenditure in an easy access account should be enough to tide you over.

Just remember that cash accounts come with an opportunity cost compared to money that is invested. This can be especially apparent during periods of high inflation, when your savings could effectively be losing value in real terms. Keep just enough in cash, but not too much.

2. Factor in inflation and wider market factors

Rachel Reeves used her 2024 Autumn Budget to confirm that unused pension funds would be brought into the IHT net from 2027. This has led some retirees to withdraw their pension funds more quickly than they might otherwise have done, which could be a problem in later life.

After a lengthy career, your retirement is the time to relax and enjoy yourself. You should never feel guilty about spending your hard-earned money as you see fit, but you also need to be sure that your money won’t run out.

Managing pension decumulation is a difficult juggling act. You need to think about how much money you need now, as well as how much you might need in the future. This means factoring in the cost of later-life care, for example, and understanding the impact of inflation and market dips.

When inflation is high, the spending power of your withdrawn amount diminishes, and you might be tempted to withdraw more.

Periods of short-term volatility, meanwhile, lower the value of your pension’s investments. You need to sell more units to achieve the same level of income, which can deplete your fund faster than expected. Keeping a close eye on your pot should help.

3. Think about the timing and order of withdrawals to help keep your tax bill down

Not all of your retirement income may come directly from the pensions you hold. You might have ISA savings and investments, or rental income from property.

ISAs and pensions offer tax-efficient environments in which to grow and access your wealth, but recent changes have muddied the waters.

With pension funds coming into scope for IHT, you’ll want to carefully manage your withdrawals to avoid an unnecessary tax bill on death. The effective cap on Cash ISAs from 2027, meanwhile, could also mean you need to revisit your holdings.

At The Pension Planner, we can help you think about the most tax-efficient way to access the funds you have.

This might include timing withdrawals across tax years or transferring funds to a spouse or partner to share exemptions and allowances. We can also help you think about how you order withdrawals to maintain your lifestyle now while keeping hold of contingencies for when you need them.

4. Deferring your State Pension could provide a retirement boost when you need it

According to UK Data Service figures (published by Age UK), more than 1 million UK workers are beyond the State Pension Age (currently 66, rising to 67 between 2026 and 2028).

If you receive employment income, possibly alongside personal pension income, it might make sense to defer your State Pension until you really need it.

Deferring the State Pension is incredibly easy because you don’t receive it automatically – you have to apply for it. Simply choose not to apply, and your entitlement will be deferred. Not only that, but the amount you receive when you do opt to take it will usually be higher.

If you reached State Pension Age on or after 6 April 2016, and defer for at least nine weeks, you’ll receive an additional 1% for every nine weeks you defer (or around 5.8% a year).

5. Consider the impact of Inheritance Tax pension changes

We’ve already spoken about the changes to the IHT treatment of unused pension, effective from 2027. If you planned to use your pension as a means of passing on a tax-efficient inheritance, you may need to revisit your estate planning.

Remember, however, that pensions are a tax-efficient environment, and these new rules only apply to estates where IHT is payable. The nil-rate and residence nil-rate bands currently stand at £325,000 and £175,000, respectively. The spousal exemption will continue to apply from 2027, so you can pass your pension to your spouse tax-free. Unused IHT allowances can also be passed between spouses on death, and that could leave your partner with £1 million of tax-free allowance.

Pension savings remain an important way to fund your retirement, and our team of experts can help you do so tax-efficiently.

Get in touch

If you have any concerns about managing your pension withdrawals sustainably, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.