Are you planning to retire in 2026? You’re probably working out how much you can safely withdraw from your pension each year to avoid running out of money. But the old guidance of drawdown amounts may no longer apply, according to new analysis.
Most people have at least some of their pensions in defined contribution schemes. Because these are individual invested pots, retirees have to decide how much they draw down from them to fund their lifestyle without running out of money.
For years the rule of thumb has been if you wanted to make sure your invested pension lasted, you would withdraw 4% a year, uprated every year in line with inflation. This is known as the 4% rule. However new analysis by investment research company Morningstar suggests it’s too high for 2026.
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Morningstar’s 2025 retirement income research suggests that 3.9% is the highest safe starting withdrawal rate. This is for retirees looking for a stable level of income that increases with inflation to cover their spending year-to-year.
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A 3.9% withdrawal rate gives a 90% chance of having money remaining at the end of an assumed 30-year retirement period, Morningstar said.
The calculation is based on forward-looking asset-class returns and inflation assumptions, which are used to arrive at a starting safe withdrawal rate for new retirees. It excludes things like the state pension and other income sources.
It assumes a portfolio with an equity weighting of between 30% and 50%. Because of the higher volatility associated with higher equity weightings, boosting stocks detracts from the starting safe withdrawal percentage rather than adding to it, the report’s analysts pointed out.
The 3.9% so-called ‘safe withdrawal rate’ for 2026 is actually up slightly from the starting safe withdrawal percentage for 2025, which Morningstar estimated was 3.7%.
The base case estimates for starting safe withdrawal rates for a new retiree with a 30-year time horizon with a 90% probability of success were 3.3% in 2021, 3.8% in 2022, and 4% in 2023.
“These numbers aren’t meant to imply that people who are already retired should shift their spending up or down from year to year; rather, they represent our best estimate of the starting safe withdrawal rate for a person currently embarking on retirement,” the report said.
Is the 4% pension rule dead? Why the 6% rule could replace it
New retirees don’t have to settle for such a low withdrawal rate of 3.9% or even 4%, however – and arguably they shouldn’t.
Those who are willing to tolerate some fluctuations in their spending – rather than needing a fixed, consistent amount – can start with a withdrawal rate of nearly 6%, the Morningstar research found.
“The right level of flexibility in a retiree’s spending system will depend on the individual’s tolerance for spending changes, including the extent to which fixed expenses are covered by nonportfolio income sources,” Morningstar said.
Remember the 4% rule allows for money to be left over from a pension. But changes to inheritance tax rules are looming – most unused pension funds will be part of the estate for inheritance tax purposes from April 2027 – so leaving pension money to loved ones in your will is no longer so attractive.
‘Pensions are for spending’ is the new mantra now inheritance tax will apply to them from April 2027. In exclusive calculations, we show how much more you can take from your pension to wind it down completely by age 90 – asking is this now the era of the 6% rule?
How much do I need for a comfortable retirement?
How much you actually need in pounds and pence terms in retirement will depend on the kind of lifestyle you want in later life. Everyone has different financial priorities and these can vary by age.
But recent data from Pensions UK, formerly the Pensions and Lifetime Savings Association (PLSA), shows the cost of a comfortable retirement – where you get to enjoy some extra luxuries – has jumped again, from £43,100 to £43,900 a year for a single person household and from £59,000 to £60,600 a year for a two-person household.
The cost of a comfortable retirement allows for spending on extra luxuries such as regular beauty treatments, theatre trips and two weeks of holiday in Europe a year.
Investment platform Interactive Investor highlights that these figures are after paying tax, so you technically need to earn more to meet these standards.
For this level of retirement, Pensions UK calculated someone living alone would need a pension pot of around £540,000 to £800,000, if using it to buy an annuity for a guaranteed income. For two people sharing bills it would be £300,000 to £460,000.
A more modest, ‘moderate’ level of retirement would require a pension pot of around £31,700 (previously £31,300) for a single person and from £43,900 (up from £43,100) for two people living together.
For a basic retirement you would still need a pension of £13,400 a year – though this is down from £14,400. For a couple, this has fallen to £21,600 from £22,400.
