More than 12 million UK adults are on track to fall short of covering basic costs in retirement, according to the latest National Retirement Forecast from Scottish Widows. That’s nearly a third of working-age people whose pension savings, State Pension, and other assets combined won’t stretch far enough to meet essential living expenses. The figure has improved from 39% in 2025, but it still means millions face a retirement where every pound counts — and where getting the withdrawal rate wrong by even one percentage point can shorten a pension’s lifespan by years.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
Since pension freedoms arrived in 2015, millions have chosen flexi-access drawdown over traditional annuities. The flexibility is real — you control how much you take and when. But the risk is equally real: your pot can run out while you’re still alive. Research from the Financial Conduct Authority shows many retirees are withdrawing at rates that simply aren’t sustainable. Some are taking 8% or more each year, which could drain a pension within 15 years. With average life expectancy still rising, the gap between how long your money lasts and how long you live is the central problem this article tackles.
Here’s what you actually need to know.
What Guided Retirement Means for Your Pension
The Pension Schemes Act 2026 introduces a new concept called Guided Retirement. It’s a government-led reform requiring pension trustees to offer default pensions designed to provide sustainable retirement income without requiring complex decisions from the member. The idea is straightforward: most people don’t have the expertise or inclination to manage drawdown, sequence risk, and withdrawal rates on their own. The guiding principles for default pensions make clear that protection against longevity risk is a central requirement. Default pensions will likely use a “flex then fix” approach — flexible withdrawals early in retirement, then a guaranteed income product later. You can still opt out and manage your own money, but the default is designed to stop you running out.
What I tend to notice is that the people who benefit most from default options are the ones who never thought they needed them. If you’re confident managing your own drawdown, Guided Retirement doesn’t take that freedom away. But if you’re among the 52% of DC savers with low pension engagement, having a professionally designed default could be the difference between a comfortable retirement and running out at 82.
Withdrawal Rates, Life Expectancy, and the State Pension
The single most important number in retirement planning is your withdrawal rate — the percentage of your pension pot you take as income each year. Get this wrong and nothing else matters. The table below shows what different withdrawal rates mean in practice.
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| Withdrawal Rate | Risk Level | Best For |
|---|---|---|
| 2.5–3% | Very conservative | Early retirees (55–60) and those wanting to preserve capital |
| 3–3.5% | Conservative | Most retirees without other guaranteed income |
| 3.5–4% | Moderate | Those with State Pension or other guaranteed income |
| 4–5% | Higher risk | Likely to deplete the pot within 20 years |
| 5%+ | Unsustainable | Likely to deplete the pot within 15 years |
Life expectancy is the other number that matters. A 65-year-old man has a one-in-four chance of living past 92, and a 65-year-old woman has a one-in-four chance of living past 94, according to the Office for National Statistics. A woman reaching State Pension age today has an average life expectancy of around 89, with a 1-in-10 chance of reaching 98. If you retire at 55, you could need your pension to provide income for over 40 years — and for the first 12 of those, there’s no State Pension to fall back on. The full new State Pension pays £241.30 per week in 2026, rising each April under the triple lock. For someone with a full National Insurance record, that’s roughly £12,500 per year. It’s inflation-linked and guaranteed for life, which makes it the foundation most retirement plans should build on. If you’re approaching retirement and haven’t checked your State Pension forecast, that’s the first step before any withdrawal rate planning.
If you’re unsure how to model these scenarios, speaking to a qualified adviser can help. Services like Financial Advisor offer access to professionals who can run cashflow projections tailored to your situation.
The Mistakes That Drain Pension Pots
That 31% figure — 12.2 million people — isn’t just about people who saved too little. It’s also about people who made avoidable mistakes with what they had. Here are the most common ones.
Taking 8% or more from drawdown
The FCA has found that some retirees are withdrawing 8% or more of their pension each year. On a £200,000 pot, that’s £16,000 annually. At that rate, the pot is likely gone within 15 years, even with reasonable investment growth. The mechanical problem is simple: the money comes out faster than the investments can grow. If you’re taking more than 5%, you’re effectively spending capital at a rate that guarantees depletion before average life expectancy. The fix is to calculate a sustainable withdrawal rate based on your actual pot size and life expectancy, not what you wish you could take.
Ignoring sequence of returns risk
Sequence of returns risk is the danger that poor investment returns in the early years of retirement permanently damage your pension. Two retirees can have the same 7% average annual return over 20 years, but if one experiences losses in the first few years and the other doesn’t, the first will run out of money sooner. That’s because you’re selling investments at low prices to fund withdrawals, locking in losses. The fix: reduce equity exposure in the first five to ten years of retirement, or build a cash buffer so you’re not forced to sell when markets are down.
Not securing guaranteed income for essentials
Among people who partially encashed a DC pension in the four years to May 2024, only 33% strongly agreed they were confident of having enough assets to last through retirement. That lack of confidence often stems from having no guaranteed income floor. If your essential costs — housing, food, utilities, insurance — aren’t covered by the State Pension, a defined benefit pension, or an annuity, then every market downturn becomes a crisis. The floor-and-upside approach solves this: guaranteed income covers essentials, drawdown covers discretionary spending. Without that floor, you’re gambling with your basic living standard.
Overlooking the compounding cost of fees
On a £300,000 pension over 25 years, the difference between 0.5% and 1.5% in total annual fees is approximately £95,000. That’s not a theoretical number — it’s money that could fund an extra five years of retirement income. Many older workplace pensions and legacy SIPPs charge well above 1%. The fix: check your ongoing charges figure (OCF) and consider consolidating into a lower-cost provider. The most common retirement regrets among UK retirees include not reviewing fees sooner.
The mistake I see hit hardest is the first one — the unsustainable withdrawal rate. It’s the one that compounds fastest and is hardest to reverse once you’re several years into retirement. If you’re taking more than 4%, it’s worth running the numbers on what that means at age 85.
Building a Retirement Income That Lasts
The goal isn’t to maximise income in the first five years. It’s to ensure the pension still exists at 95. That requires a structure, not just a withdrawal rate. Here’s how to build it.
The floor-and-upside approach
Calculate your essential living costs — housing, food, utilities, insurance, transport. Then map your guaranteed income sources against them. The full new State Pension provides roughly £12,500 per year. If you have a defined benefit pension, add that. If there’s still a gap, consider using part of your DC pot to buy an annuity to fill it. A £100,000 pot at age 65 currently yields around 6–7% income depending on provider and health, so that could add £6,000–£7,000 per year guaranteed. Once essentials are covered, the rest of your DC pot can stay invested in drawdown for discretionary spending — holidays, hobbies, gifts. That structure means you never have to sell investments at a loss to pay for heating.
Building a cash buffer
Keep one to two years of income in cash — a savings account or money market fund. If you need £15,000 per year from drawdown, keep £15,000–£30,000 in cash. When markets drop, you draw from the cash buffer instead of selling investments at depressed prices. When markets recover, you top the buffer back up. This simple mechanism eliminates sequence risk for the first one to two years of any downturn, which is usually enough to ride out the worst of it.
The bucket strategy
Split your pension into three buckets. The short-term bucket (cash) covers one to two years of income. The medium-term bucket (bonds or low-volatility investments) covers years three to seven. The long-term bucket (equities) covers everything beyond seven years. You withdraw from the short-term bucket and replenish it from the medium-term bucket when markets are stable. The long-term bucket stays invested for growth. This structure forces discipline and prevents the emotional selling that destroys portfolios.
Planning for care costs
Long-term care is the unknown that can unravel any retirement plan. Average residential care costs in the UK are around £35,000–£40,000 per year, and nursing care can exceed £50,000. In England, the upper capital limit for means-tested care is £23,250, and your pension pot counts as capital if you’re already drawing from it. Options include keeping some pension invested as a care reserve, considering an immediate needs annuity, or understanding how the means test applies to your specific situation. If you’re within ten years of retirement, it’s worth modelling a care cost scenario alongside your standard retirement plan. For estate planning considerations, Estate Lawyer services can help clarify how pension pots interact with inheritance and care funding rules.
- Calculate essential and discretionary spending needs
- Map guaranteed income sources (State Pension, DB pension, annuity)
- Determine the gap your drawdown needs to fill
- Set a sustainable withdrawal rate (3–4% for most retirees)
- Build a cash buffer of one to two years of income
- Choose a low-cost drawdown provider
- Invest appropriately for your risk tolerance and time horizon
- Review your plan annually and adjust as needed
If you’re self-employed or in part-time work, the numbers are tougher. The Scottish Widows data shows 35% of self-employed workers and 34% of part-time workers face a less-than-minimum retirement lifestyle, compared to 19% of full-time employees. The median projected retirement income for self-employed workers is £25,000, against £38,000 for full-time workers. If that’s your situation, the checklist above matters even more — and consolidating old pots into a single low-cost SIPP can reduce fees and simplify tracking. You might also consider semi-retirement as a bridge to full retirement, allowing you to delay drawing on your pension while building guaranteed income.
Frequently Asked Questions
How long does my pension actually need to last? ▾
What withdrawal rate should I use? ▾
Should I buy an annuity or stay in drawdown? ▾
How does the Money Purchase Annual Allowance affect me? ▾
What happens to my pension when I die? ▾
How do care costs affect my pension? ▾
The 2026 Reforms Won’t Save You From Bad Decisions
Guided Retirement and the pensions dashboard (launching 31 October 2026) will help. Default pensions designed by experts will reduce the risk of catastrophic withdrawal rates for people who don’t want to manage their own drawdown. The dashboard will make it easier to find lost pots and consolidate small balances. But neither reform fixes the fundamental maths: if you withdraw too much, too early, your pension runs out. The 2026 changes are a safety net, not a solution. The solution is understanding your withdrawal rate, securing guaranteed income for essentials, and reviewing your plan annually. That work is yours to do.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Beyond the Pension: Unconventional Retirement Income Streams for UK Retirees.
Sources and Further Reading
The Myth of the Relaxing Retirement: Staying Active and Engaged in the UK — Explores how retirement structure affects wellbeing and why purpose matters as much as pension income.
Retirement Boredom: How to Avoid a Life of Leisure Turning Into a Downward Spiral — Looks at the psychological side of retirement and how to plan for meaning beyond money.
Gov.uk (2026). Pension Schemes Act 2026: Guided Retirement guiding principles. 🔗
Scottish Widows (2026). National Retirement Forecast 2026. 🔗
Pension Helper (2025). How to Avoid Running Out of Money in Retirement. 🔗
Insight HQ (2026). Pension Planning and Retirement UK 2026: Key Changes, Strategies, and How to Maximise Your Pot. 🔗
