Pension Adjustment: Is the 4% standard obsolete? Possible shift towards the 6% guideline
In a significant change to retirement planning, the new "safe" withdrawal rate from pension savings is estimated to be around 6-6.5% per year, up from the traditional 4% rate. This adjustment takes into account recent changes, such as the 2024 Autumn Budget’s inheritance tax reforms [1].
One of the key drivers behind this increase is the upcoming inheritance tax reform. From April 2027, most unused pension funds and death benefits will be treated as part of a person’s estate and subject to inheritance tax [2][3]. This aligns pension death benefits with other inherited assets for tax purposes, potentially reducing the incentive to retain pension wealth solely for inheritance.
This change could lead to an increase in larger annual pension withdrawals, as retirees seek to minimize tax exposure on death. For instance, a £500,000 pension pot could be depleted by age 90 with a 5.5% withdrawal rate [4].
Ed Monk, associate director at Fidelity International, and Andrew King, a pensions specialist at Evelyn Partners, have both stated that more people are looking to spend or gift their pensions more quickly following the budget announcement [5].
However, before increasing pension withdrawals, savers should consider the potential risks. The risk of running out of money to fund their own retirement, especially in the event of a bear market or a bout of severe inflation, should not be underestimated.
It is important to note that the 4% rule is not dead but is considered blunt and potentially outmoded as a guide for how much to withdraw from a pension each year [6]. A professional financial adviser would draw up bespoke and detailed financial plans based on an individual’s overall spread of assets and their needs and desires, which might mean a different withdrawal rate than the 4% rule [7].
Thousands of over-55s have already withdrawn tax-free lump sums from their pensions early due to these changes [8]. The impact could be significant for large pension pots, as leaving a large unused pension pot could trigger inheritance tax liabilities [2].
In conclusion, the new inheritance tax rules should be factored into retirement planning, particularly when deciding withdrawal strategies and estate plans, as they affect the net amount passed on to beneficiaries. The government estimates only a minority of estates will be affected, but the impact could be significant for large pension pots [2].
[1] Evelyn Partners calculations for our website [2] HM Revenue & Customs [3] Fidelity International [4] Evelyn Partners calculations for our website [5] Fidelity International and Evelyn Partners statements [6] Fidelity International [7] Evelyn Partners [8] HM Revenue & Customs data
- As the new safe withdrawal rate from pension savings increased, some individuals might consider leveraging their pensions for personal-finance needs, such as spending or gifting, with a higher allowance, due to the anticipated tax savings and potential reductions in inheritance tax liabilities.
- In light of the upcoming inheritance tax reform and increased withdrawal rates, it's essential for savers to consult a financial advisor for personalized financial plans, ensuring that they don't compromise their own retirement savings by taking excessively high withdrawals, especially during economic downturns or periods of high inflation.
