Reaching retirement after decades of saving is a major milestone—but transitioning from wealth accumulation to decumulation (spending your savings) can feel daunting. Many retirees hesitate to tap into their hard-earned pensions, unsure how to manage withdrawals sustainably.
Your retirement income will likely come from multiple sources, with private pensions playing a key role. These typically fall into two categories:
1. Defined Contribution (DC) Pensions
A pot of invested money (e.g., workplace pensions or SIPPs).
You control withdrawals—but once it’s gone, it’s gone.
2. Defined Benefit (DB) Pensions
A guaranteed income (often based on salary or career average).
Typically provided by former employers.
Since most people have DC pensions, smart withdrawal strategies are crucial. Without proper planning, retirees often make three expensive mistakes that can drain their savings prematurely.
Mistake #1: Withdrawing a Large Lump Sum Too Soon
Starting in the 2025/26 tax year, you can access private pensions at age 55. But just because you can withdraw doesn’t mean you should.
The Tax Trap
Only 25% of your pension is tax-free (known as “Pension Commencement Lump Sum”).
The remaining 75% is taxable at your marginal Income Tax rate.
Taking a full lump sum could mean losing a huge chunk to taxes unnecessarily.
The Inflation Risk
Withdrawing everything and parking it in a savings account may seem safe, but inflation erodes cash value over time. Most savings accounts don’t outpace inflation, whereas keeping funds invested has historically provided better long-term growth.
🔹 Smart Alternative:
Leave your pension invested as long as possible.
Withdraw gradually to minimize tax and inflation risks.
Consider flexi-access drawdown for controlled income.
(For more on tax-efficient withdrawals, check HMRC’s pension guidance.)
Mistake #2: Underestimating Longevity Risk
Many retirees underestimate how long they’ll live, leading to overspending early in retirement.
A 65-year-old today has a 1 in 4 chance of living past 90 (Office for National Statistics).
Running out of money in your 80s or 90s can be disastrous.
🔹 Smart Alternative:
Use the “4% Rule” (withdraw 4% annually, adjusted for inflation).
Consider annuities for guaranteed lifetime income.
Regularly review spending and adjust withdrawals.
Mistake #3: Ignoring Investment Growth in Retirement
Some retirees shift entirely to ultra-safe assets (e.g., cash or bonds), missing out on long-term growth.
Equities historically outperform over long periods.
A balanced portfolio (60% stocks, 40% bonds) can reduce risk while maintaining growth.
🔹 Smart Alternative:
Keep a portion invested in growth assets.
Work with a financial advisor to adjust risk as needed.
(For portfolio strategies, see Vanguard’s retirement insights.)
Key Takeaways
✅ Avoid large lump sums—they trigger unnecessary taxes and inflation risk.
✅ Plan for a long retirement—use sustainable withdrawal strategies.
✅ Stay invested wisely—don’t abandon growth assets completely.
Retirement should be enjoyable, not stressful. By avoiding these three costly mistakes, you can make your savings last—and live retirement on your terms.
📌 For more retirement planning tips, visit Which? Pensions Advice.
