When times are tough and money is tight, it’s time to sit down and look at where and how you might be able to make ends meet. This could be done by dipping into savings, changing where you shop for groceries or even cancelling that rarely used Netflix subscription.

The latest data from HM Revenue & Customs suggests that some people may be looking to their pension pots for some respite. According to the latest figures1, £4bn worth of taxable pension payments were withdrawn from retirement pots by 567,000 individuals between April and June this year, with an average withdrawal per person of £7,100. This compares to £3.4bn of withdrawals during the previous quarter.

The rules for accessing your pension are in most cases more flexible than they used to be. Rather than wait until you’re old enough to also draw a pension from the state (66-68, depending on your current age), you can now access your private pension savings sooner – from as early on as 55 (a minimum age that will rise to 57 in 2028).

But while this is an option, it may not always be the most sensible one and in the long-term, could leave you in a worse position than before. 

Think about the tax implications

Something to also be aware of is that, while we’re all entitled to a tax-free cash lump sum from our pensions (in most cases, up to 25% of the total), income drawn from a pension is taxable at your personal rate of income tax. 

That means if you take out too much too quickly, on top of any other income you are earning, you could unwittingly incur a high tax bill.

Instead of taking the full tax-free cash lump-sum entitlement, you could draw from it gradually to enhance your tax-free income. For smaller withdrawals, 25% of each will be tax-free, while the remaining 75% will be taxed. 

Note that using your tax-free cash allowance instead of income does not impact your annual pensions allowance2 and you could still have time to build what was withdrawn back up. Your pension also falls outside of your estate3. Take money out of that pension, however, and it instantly becomes part of your estate. As such, it could incur inheritance tax on your passing.

It’s additional food for thought – especially if you’re just going to park the money in a bank or reinvest it via an individual savings account (ISA).

How to withdraw sustainably

If you have decided to access your pension to help navigate the current cost-of-living crisis, then you should consider how you’re going to do so sustainably.

Many people choose to take a fixed amount of income from their pension, for example, but this could lead to you withdrawing an amount that does not take account of market performance, which could in turn see your pot run out sooner than you’d like when it comes to retirement.

To preserve your portfolio’s long-term spending power without radically impacting the yearly amount you withdraw, you could consider a ‘dynamic spending’ strategy4. This method involves setting a ‘ceiling’ and ‘floor’ (or maximum and minimum) on how much you can withdraw, depending on how market performance impacts the value of your pension.

The ceiling means you can build a buffer in good years (when market performance is strong), while the floor helps to maintain a reasonable level of spending during the bad years (when the value of your pension falls).

This method allows you to stay balanced and disciplined (two of our four investing principles) and also means your pot may have a better chance of lasting longer than taking a fixed amount each year that you decide to dip into it5.

The point of your pension

Of course, the most important thing is to not lose sight of why you have a pension: to support you in retirement. You may have to rely on it for many years to come. If you don’t withdraw from your pension at a sustainable rate, you risk being left with just the state pension6 to depend on later in life.  

People also often underestimate their life expectancy. The latest official data7 says that life expectancy in the UK is 79.0 years for males and 82.9 years for females. 

If you decide to dip into your pension at the earliest possible age – so, at 55 – then you’ve still got plenty of years to get through on your pension pot, so, as we have explained above, cashing in even some of it now can have a huge impact.


1 Private pension statistics commentary: September 2023, HMRC, 27 September 2023. 

2 The annual allowance is the most you can save into a pension in a tax year before you have to pay tax. For 2023-24, it is £60,000. 

3 However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay). 

4 Sustainable spending rates in turbulent markets, Ankul Daga, CFA, David Pakula, CFA and Jacob Bupp, Vanguard Research Note, January 2021. 

5 Source: Vanguard analysis. Assuming starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Ceiling: 5%. Floor: -2.5%. Asset allocation: domestic shares: 10%, international shares: 40%, domestic bonds: 17.5%, international bonds: 32.5%. 

6 The state pension age is under review but currently lies between 66 and 68, depending on when you were born. For more information how it applies to you, use the government’s online tool.  

7 National life tables – life expectancy in the UK: 2018 to 2020, Office for National Statistics, 23 September 2021.

Man on tablet

Vanguard Personal Pension

Straightforward retirement saving at low cost

Man on tablet

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.

Performance may be calculated in a currency that differs from the base currency of the fund. As a result, returns may decrease or increase due to currency fluctuations.

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.

Other important information:

If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.

This document is designed for use by, and is directed only at persons resident in the UK.

The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2023 Vanguard Asset Management Limited. All rights reserved.