The potential demise of the 4% pension rule, and the rise of a new standard: the 6% rule
With the upcoming changes in inheritance tax rules and the ongoing discussions about pension taxation, retirees are facing a significant shift in how they manage their retirement savings. Here's a breakdown of the current situation and what you need to consider when planning your pension withdrawals.
Firstly, it's important to note that the tax-free pension withdrawal remains at 25% as of the 2025/26 tax year. However, the traditional 4% withdrawal rule, often considered safe, might need adjustment to account for inflation and market risks.
For instance, if you have a pension fund of £750,000, a 6% withdrawal rate would require a yearly withdrawal of £44,500, which could potentially deplete your fund by age 90. On the other hand, a 4% withdrawal rate would leave you with £562,500 after taking the tax-free cash, assuming a tax-free lump sum of £187,500, and would leave a fund of £118,267 at age 90.
Similarly, for a £500,000 pension pot, a 4% withdrawal rate would leave £591,300 at age 90, while a 6.5% withdrawal rate would result in the fund running out by age 90, leaving £509,412 at that age.
It's worth noting that these rates are financial guidelines rather than statutory limits. Moreover, the upcoming inheritance tax changes may affect the pension inheritance tax treatment but do not specify changes to withdrawal rates.
In light of these changes, it's advisable to consult a pension specialist or financial advisor for personalized guidance. A professional financial adviser would draw up bespoke and detailed financial plans based on an individual's overall spread of assets and needs and desires.
Recent trends suggest that more people are looking to spend or gift their pensions more quickly post-Budget announcement. Andrew King, a pensions specialist at wealth management firm Evelyn Partners, has stated that the government's plan to levy inheritance tax on pensions changes "completely the way in which many will look at their retirement savings".
Evelyn Partners has calculated that the new 'safe' withdrawal rate rule to spend it all could be more than 6%. Thousands of over-55s have already withdrawn tax-free lump sums from their pensions early due to these upcoming inheritance tax rule changes, and experts predict the trend of cashing in pensions early will accelerate.
From April 2027, unused pension assets will be subject to inheritance tax. For a £1 million pension pot, a 6.5% withdrawal rate would result in the remaining pension fund running out by age 90, compared to a 4% withdrawal rate leaving a fund of £1,043,000 at age 90.
In conclusion, while the tax-free pension withdrawal remains at 25%, retirees should be cautious about their withdrawal rates, especially with the upcoming inheritance tax changes. It's crucial to consult a pension specialist or financial advisor for personalized guidance, as everyone's financial situation is unique.
With the upcoming inheritance tax changes on pensions and alterations in pension taxation, it's essential to consider personal-finance strategies that involve both pensions and savings. The traditional pension withdrawal rate of 4% might need adjustments due to inflation and market risks, but a higher rate could potentially lead to depletion of funds earlier.
As a result, consulting a pension specialist or financial advisor becomes crucial for personalized guidance on tailored spending plans, especially in light of the impending inheritance tax implications on pensions.
