UK retirees could safely withdraw up to 5.7 per cent from their pension funds at retirement, provided they can afford to take a more flexible approach to income during period of market turbulence, according to new Morningstar research.
This research, The State of Retirement Income UK 2026, looks at what might be a safe and sustainable level of income withdrawal for retirees entering drawdown.
For those that do not have the flexibility to adjust payments, Morningstar says the highest ‘safe’ starting withdrawal level is 4.1 per cent for those looking to draw a fixed, inflation-adjusted income over 30 years.This is marginally higher than a the ‘4 per cent rule’ which has often been adopted as a rule of thumb when looking at DC withdrawals.
However, the research found that dynamic withdrawal strategies — where retirees reduce income after weak markets and increase it after stronger returns — can materially improve starting income levels. Two flexible methods tested by Morningstar supported starting withdrawals of up to 5.7 per cent for a balanced portfolio, invested in a mix bonds and equites.
The report said this flexibility is particularly important because rigid withdrawals can force savers to sell assets after market falls, exposing them to sequence-of-returns risk.
The research said this has key implications for the current debate around collective defined contribution (CDC) schemes. CDCs pool investment and longevity risk and allow income to be adjusted over time, and as such may allow investors to take be better placed than individual drawdown pots to manage the trade-off between income stability and flexibility.
This research, found that typically conservative portfolios work better for reliability, with the strongest results coming from portfolios with around 70 per cent in bonds and cash, and the rest in equities.
Morningstar says this is because higher bond yields now provide more dependable income and reduce early‑retirement risk. Morningstar found that, in failed all-equity simulations, nearly 65 per cent involved portfolio losses within the first five years of retirement, highlighting that diversification is important and sequence risk remains a key issue for retirees.
The research was based on forward‑looking market and inflation assumptions for a diversified UK‑tilted portfolio, rather than historical averages, and modelled 1,000 retirement scenarios over a 30‑year horizon.
Morningstar stressed that its analysis relates only to investment portfolio withdrawals and does not include state, defined benefit or other pension income. It also excludes tax and fees, which would reduce actual take-home withdrawals.
Morningstar also points out that much of the research on sustainable income levels have been based on US retirees and US equity markets and inflation figures.
Morningstar director of personal finance and retirement planning Christine Benz says: “Retirees are often told to treat the 4 per cent rule as a hard ceiling, but for UK investors that view is increasingly outdated.
“Our analysis shows that, with today’s higher bond yields and UK‑specific, forward‑looking assumptions, many new retirees can reasonably start at around 4.1 per cent while still maintaining a high probability of success over a 30‑year retirement.
“Flexibility is the real game‑changer. Retirees who are willing to make modest spending adjustments after weaker market years, rather than rigidly inflation‑proofing withdrawals every year, can materially increase their starting income, in some cases to as much as 5.7 per cent.
“That doesn’t mean abandoning discipline or taking excessive risk, but recognising that retirement spending isn’t static. The key is aligning withdrawal strategies with both market conditions and an individual’s tolerance for income variability.”
For advisers and pension providers, the report underlines that there is no single “safe” withdrawal rate. Retirees prioritising stable income may prefer a lower starting rate, while those able to tolerate variable payments — particularly where essential spending is covered by other pension income — may be able to draw more. The report concluded that flexibility can significantly improve retirement income outcomes, but only where savers understand and accept the potential for income to rise and fall over time.
