How far £400,000 could get you in retirement

From a distance, retirement can seem like a relaxing end to a career full of stressful days. But as retirement nears, it comes with it's own anxieties: How far will your money really go, and can you afford the retirement you always dreamt of?

Unfortunately, there’s no concrete answer on how far a £400,000 retirement pot will get you, because it will depend on factors like how much you withdraw based on your lifestyle, changing tax rules, investment growth, and inflation rates.

But we can model what one person's situation might look like to help you get a reasonable idea. For the purposes of this article, we will assume the investor has all their pensions in a defined contribution pension pot and will not be purchasing an annuity.

Let’s take a retiree named Jane. She has chosen to retire this year at age 66 and gained access to the state pension at age 66. The full state pension is worth about £12,548 for the 2026/27 tax year. In the Retirement Living Standards set out by Pensions UK for this year, a single retiree wanting a moderate lifestyle, including a fortnight holiday abroad and a weekend trip in the UK, occasional meals out, and a small car, could need £32,700 in post-tax income to fund a year of retirement.

Note that Pensions UK assumes no remaining mortgage or rent. For Jane, £12,548 will come from the state pension, and £20,152 will have to come from her personal pension. Knowing that she will need to allow some extra money to cover tax, Jane has opted to withdraw £24,000 from her pension.  

She is taking 25% of her tax-free cash with each withdrawal, meaning she’ll have £18,000 subject to tax. Her state pension leaves her with just £22 of her personal allowance remaining, meaning £17,978 of her withdrawal will face 20% income tax. That will leave her with £14,382.40 after tax, plus her state pension of £12,548, £22 untaxed under the personal allowance and £6,000 in tax free cash, giving her £32,952.40 after tax, just over the Pensions UK recommendation.

We’ll go into how you might go about factoring in tax to your pension withdrawals below, but this will depend largely on how big your withdrawals are and how you opt to take your tax-free cash.

If she had a spouse, the amount needed from her own pension gets significantly smaller, with the couple possibly needing £45,400 combined, according to Pensions UK. Of, that, £25,096 would come from state pensions (assuming both members of the couple are of age and qualify for the full state pension), and only £10,152 would be needed from Jane’s pot after tax, assuming she split the costs in half with her spouse. For these calculations, we’ll assume Jane withdraws £12,000 from her own pot to help cover any tax.

So, how would these withdrawals add up over the years? In this example, we’ll assume that the state pension increases by 2% each year and inflation increases by 2% each year. At the same time, Jane’s pension grows by 5% each year after fees through investments. With those withdrawals, as well as the growth, Jane’s pension could last until age 88 as a single person. If part of a couple where both parties contributed the same amount, Jane’s pension at 88would be higher than where it started at age 66.

As a couple this means they may be able to move closer to ‘comfortable’ lifestyle retirement territory, including more weekend getaways and more frequent meals out. Pensions UK estimates the cost of this lifestyle at £62,700 per year as a couple, or £31,350 for each person in the couple split equally. Assuming the tax calculations above, Jane withdraws £23,000 from her own pension, plus the £12,548 state pension for a total of £35,548.At this spending rate, Jane’s pension would last until 89. Note that many couples won’t split their retirement spending 50/50, so this is just a guide. In addition, tax rules can change during this time so calculations will need to be adjusted. 

• Read: Your state pension next year: what to expect

How much of your pension pot would go to tax?

If you retired with a pension pot worth £400,000, you’d likely be able to take the full 25% in tax-free cash, officially called the Pension Commencement Lump Sum (PCLS). The rest of the could be taxed as income. If you take your pension tax-free cash as a lump sum at the beginning of retirement, 25% of £400,000 would give you £100,000 of tax-free cash. Well within the standard Lump Sum Allowance of £268,275.

However, if you chose to spread out your tax-free cash or wait to take your tax-free cash and continue investing your retirement pot, you may be able to increase the amount you take. For example, if your pension pot grew from £400,000 to £500,000 in your early years of retirement, because your investments were outpacing any withdrawals, you could get an extra £25,000 in tax-free cash (25% of £500,000 = £125,000).

Just like before retirement, the rate of income tax will depend on your income throughout the tax year. This would include money from your pension and the state pension. It can also include income from investments held outside a tax wrapper, or income from another source like a property you rent out.

If you are able to limit any income in the year to £50,270, you can stay within the basic tax rate band of 20%. Just like before retirement, you will also have a personal allowance of £12,570 each year on which you pay no income tax.

There’s a few different ways the tax may work on your withdrawals, depending on if you used your tax-free cash in a lump sum or if you are spreading it throughout your retirement, and if you are state pension age.

Example: Let’s say Beth, age 60, withdrew £30,000 from her pension. She has decided to split her tax-free cash over her retirement withdrawals and has no other income. This means 25% of her £30,000, equal to £7,500, will be tax free. Of the remaining £22,500, £12,570 will fall into the personal allowance and not face tax. That means just £9,930 will be taxed at the basic rate of 20%, with a total of £1,986 going to income tax. From the original £30,000, that’s a bit over 6.6%. That leaves her income after tax at £28,014.

You may be able to reduce the amount you take from your personal pension once you gain access to the state pension, which could help the burden on your savings.

The reality of retirement

In modelling retirement, you’ll notice that one of the assumptions is that retirement will be linear: Inflation will rise by the same amount, investment growth will rise by the same amount, and you will withdraw a consistent amount in line with inflation each year. This is almost never how life turns out. Using models like this is still a helpful idea to get a ballpark estimate of how long your pot would last, but your retirement journey will likely be much less linear.

People sometimes explain this with the term a ‘retirement smile’. This is the idea that we spend the most at the beginning and end of our retirement, first for travel and big purchases and at the end for end-of-life care. In the middle of retirement people tend to spend a bit more time at home and therefore spend less. Even within this, there will be exceptions: you may decide to get private healthcare at some point during your retirement that increases costs, or to go on a more expensive trip.

• Read: Retirees on their shifting pension costs

For many people, a more effective strategy than sticking to the Pensions UK figures is to first take a step back from your finances and consider what you want to prioritise in your retirement. Is there a new hobby you’d like to pick up, or a social activity you’d like to budget for? Take stock of your current non-negotiable expenses such as food, bills, and a mortgage (if you still have one), as well as what your chosen leisure activities may cost. Then, assess if that matches how much you have allocated for retirement.

You’ll likely need to adjust this number over the years. If you’re ready to take a step back from work but still feel a bit uneasy about your pension pot, you can also choose to do some part-time or contract work to help ease the burden on your pension while still having more freedom. Moving to a smaller home that is closer to the places you want to spend time during your retirement could be another way to generate more cash while still working towards the lifestyle you want.

There’s no one-size-fits-all method for retirement and your spending, and no guarantee on how long a pension pot will last. But, by taking the estimates of how long pots last with steady withdrawals and looking at your own life circumstances, you can hopefully put together a picture that helps you feel more secure. It’s always okay to make changes along the way.