Pensioners cash out at double the recommended rate – are you ignoring the 4% rule?

Pensioners are burning through their retirement savings at twice the recommended rate since it was announced any unused pensions could face inheritance tax at 40%.

The proportion of pensions being drawn down at 8% or over – nearly twice the 4% rule considered safe and sustainable – has hit its highest recorded level for pots of all sizes according to analysis of the latest Financial Conduct Authority (FCA) data.

Nearly half (45%) of all pension pots were withdrawn at 8% or over in 2024/25. It marks the highest proportion recorded and up two percentage points from 2023/24.

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The record figures are from the same financial year Chancellor Rachel Reeves in her October 2024 Budget announced major changes to pension rules that mean any unused pensions will be subject to inheritance tax at 40% from April 2027, in cases where the money exceeds the IHT tax-free allowances.

Financial services consultancy Broadstone analysed the figures available from the last eight years in the FCA’s Retirement Income Market Data.

The proportion of pensions smaller than £10,000 accessed at 8% or over hit 84% but even amongst the biggest pots – those £250,000 pensions and above – around one in seven (14%) are being withdrawn at over 8%.

More than a third (34%) of pots between £100,000 and £249,000 are also being drawn down at 8% or over.

With 4% widely considered to be a safe and sustainable withdrawal rate for pensioners in drawdown, the figures suggest hundreds of thousands of pensioners could be accessing their pension at a significantly higher than recommended level.

David Brooks, head of policy at Broadstone, said: “This data is cause for alarm in the sheer number of pots that are being drawn down rapidly by pensioners.

“While the data does not tell us whether these are retirees’ main pensions that they will rely on for retirement income, it is still startling to see such high numbers rising pretty consistently over the past eight years.”

What is the 4% pension rule?

Many people taking their pension follow the 4% rule – in the first year of retirement, you withdraw 4% of your pension portfolio’s value. Then in the following years you take the same cash amount but adjust for inflation. This is considered a ‘safe’ amount to withdraw without running out of cash.

Research by fund manager Fidelity showed how by following the 4% rule you should be able to make your retirement pot last as long as you do.

It used stock market data from the past 10 years to calculate how a £100,000 pension pot invested in global shares would have fared. It then factored in withdrawals at 4% a year, increasing in line with annual inflation.

A pension pot worth £100,000 from 2015 onwards would now have £189,000 remaining – nearly double their starting amount – using a withdrawal rate of 4%, Fidelity found.

In contrast, a withdrawal rate of 5% would have left a retiree with £169,809 after 10 years, dropping to £150,642 if taking 6% and £131,474 at 7%.

Is the 4% pension rule dead? Why the 6% rule could replace it

The latest FCA figures have suggested the reign of the 4% pension ‘safe’ withdrawal rate could finally be over, with the potential for a higher new normal – the 6% pension rule – taking its place.

This is the emerging reality as retirees look to keep their hard-earned retirement savings out of the hands of HMRC – by spending it all before it can be subject to inheritance tax.

There is no limit to how much you can withdraw from your pension each year. But the aim of the game is to make it last as long as you do.

Previously, however, and since pension freedoms were introduced in 2015, some people have also used their pension as a form of intergenerational wealth transfer, because unused pension money could be passed on IHT-free – and free of income tax too if you died before age 75.

From April 2027 this will no longer be possible. Pensions will be subject to IHT if the amount in them – combined with your other assets – exceeds the tax-free threshold of £325,000. As a result, more and more people are choosing to extract higher amounts from their pensions now, to either spend, or pass on to loved ones as lifetime gifts.

While the latest figures from the FCA seem to support this trend, Broadstone’s Brooks said it is hard to tell for sure.

“The data highlights current withdrawal behaviour but it does not capture how the rate of access evolves over the long term,” he said.

“Some individuals may be choosing to front-load income in early retirement or meet temporary financial needs, so the headline figures need not imply a permanent, year-on-year pattern.”