How to make your pension last – and your retirement enjoyable
Worried about running out of money in retirement? From a ‘fixed percentage’ approach to Vanguard’s ‘dynamic spending’ strategy, we explore how to make your pension go further without missing out on life’s pleasures.
After years of saving for retirement, it’s finally time to decide how to draw income from your pension in a way that supports your lifestyle and goals. With thoughtful choices, you can enjoy your retirement without worrying about running out of money or missing out on life’s pleasures. Finding the right balance is important – and it can be simpler than you think.
In this article, we explore three ways to draw income from your pension, each with its own pros and cons, so you can choose the style that suits you best. If you’re unsure about the right approach for your needs, it’s wise to speak to a financial adviser.
Pound-plus inflation
With this method, you set an annual income (for example, £20,000) and then increase it each year to keep up with the rising cost of things like groceries and fuel (‘inflation’). While it’s simple and gives you a predictable income, it’s important to remember that your pension pot itself needs to grow in line with inflation to sustain these rising withdrawals. If it doesn’t – because markets perform badly or inflation is particularly high – your pension pot could shrink faster than you expect.
Example:
You start by taking £20,000 a year. If inflation is 2%, you’d take £20,400 in year 2, £20,802 in year 3, and so on.
Fixed percentage
In this approach, you withdraw a set percentage of your pension every year, such as 4%. If your investments do well, your income goes up. If they don’t, your income drops. This method ensures your pension pot doesn’t run out, but your income can vary a lot from year to year and you’re exposed to rising living costs.
Example:
With a £500,000 pension pot, 4% means £20,000 in year 1. If your pot grows to £550,000, you’d take £22,000 the next year. If it falls to £450,000, you’d get £18,000.
Dynamic spending: a flexible third way
Dynamic spending combines elements of both the pound-plus inflation and fixed percentage approaches. You start by drawing an annual income, such as £20,000, and in subsequent years you adjust your withdrawals to take into account both inflation and investment performance, subject to certain parameters. When markets perform well, you give yourself an income increase above inflation, but you set a ‘cap’ to avoid withdrawing too much even in really strong years. If markets perform poorly, you give yourself an income increase below inflation, but you set a ‘floor’ so you’re not forced to cut your expenditure too drastically.
Example:
You start with £20,000 a year. If inflation at the end of year 1 is 2%, your income ‘target’ in year 2 would be £20,400. However, the actual amount you draw depends on how well your investments perform, subject to a 5% cap and a -2.5% floor:
- If markets fall by 10%, you might take £19,890 (£20,400 minus the 2.5% floor, or £510), not less.
- If markets rise by 10%, you might take £21,420 (£20,400 plus the 5% cap, or £1,020), not more.
Of course, everyone is different, so the right cap and floor will depend on your individual circumstances and how flexible you can be with your planned expenditure.
Pros and cons of each withdrawal strategy
Each income withdrawal strategy has its own pros and cons, which we’ve summarised in the table below.
Comparison of income withdrawal strategies
|
Pound-plus inflation |
Dynamic spending |
Fixed percentage |
Initial annual withdrawal |
e.g. £20,000 |
e.g. £20,000 |
e.g. 4% of portfolio |
Annual rise |
Inflation rate |
Inflation rate plus/minus investment performance subject to cap/floor |
None |
Income stability |
+ Stable |
Fluctuates within stated limits |
- Unstable |
Spending flexibility |
- Not flexible |
More flexible |
+ Highly flexible |
Portfolio durability |
- Unpredictable |
More stable |
+ Infinite |
Notes: Green: positive outcome from income withdrawal strategy; Red: negative outcome from income withdrawal strategy.
Source: Vanguard, December 2025.
Why flexibility matters
Our research shows that dynamic spending combines the best of both worlds. It reduces your risk of running out of money compared with the pound-plus inflation approach, while also providing a more stable level of income than the fixed percentage strategy.
Let’s assume you have a £500,000 pension pot and begin withdrawing £20,000 a year. Using the pound-plus inflation approach, you could expect a 10% chance of running out of money within 30 years of retirement. But with the dynamic spending strategy outlined above, this risk drops to just 1%. If you started by withdrawing £25,000, the risk rises to around 30% for pound-plus inflation versus around 8% for dynamic spending1.
Meanwhile, if you used the fixed percentage strategy and drew 4% of your pot each year, you could expect to see an average income change of around £1,600 from year to year. With the dynamic spending approach, the average change would be just £600.
Choosing how to draw your retirement income is a personal decision that depends on your goals, preferences and comfort with risk. By understanding your options and weighing the trade-offs, you can find a strategy that fits your needs and gives you peace of mind. Remember, the right plan can help you make the most of your savings and enjoy the retirement you’ve worked hard for.
1 Vanguard calculations using the Vanguard Capital Markets Model (VCMM). Based on a Target Retirement 2025 Fund, fees of 0.5% and inflation at 2%. The dynamic spending approach has a 5% ceiling and a -2.5% floor. The figures are the median – or middle – figures.
IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, US money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
The primary value of the VCMM is in its application to analysing potential client portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, various risk–return trade-offs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered, such as the data presented in this paper, is the most effective way to use VCMM output.
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Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
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