What £1,500,000 pays under the 4% guideline
The most widely used planning yardstick for turning a pot into income is the 4% guideline, popularised by US financial planner William Bengen's 1994 research: draw 4% of the pot in year one and adjust for inflation, and a balanced portfolio has historically lasted a 30-year retirement. On £1,500,000, that is £60,000 a year (£5,000 a month) before tax. It is a guideline rather than a promise — UK research often lands slightly below 4% for cautious portfolios — but it anchors the comparison below.
| Strategy | Gross income/yr | Income tax | Net/yr | Net/mo |
|---|---|---|---|---|
| 4% drawdown on the whole pot | £60,000 | £11,432 | £48,568 | £4,047 |
| Take tax-free cash (£268,275), then 4% of the rest | £49,269 | £7,340 | £41,929 | £3,494 |
| Level annuity on the whole pot (7.0%) | £105,000 | £30,432 | £74,568 | £6,214 |
| Take tax-free cash, annuity on the rest (7.0%) | £86,221 | £21,920 | £64,301 | £5,358 |
Annuity figures use a typical single-life, level rate at age 65 of 7.0% — Retirement Line's July 2026 tables quote a best rate of 7.86% (Aviva) and Which? cites around £7,000 per £100,000. Annuity quotes are personalised; these are illustrations, not advice.
How the income is taxed
Drawdown income and annuity payments are taxed as ordinary income against 2025/26 bands (thresholds frozen to 2028): nothing on the first £12,570, 20% to £50,270, 40% above. Crucially, pension income pays no National Insurance — on £71,973 of gross income, a worker would lose £3,450 to NI that a retiree simply keeps. Drawing £60,000 from this pot with no other income leaves £48,568 net; the tax numbers change once the state pension joins.
Adding the state pension
The full new state pension is £11,973 a year (£230.25 a week) in 2025/26 (GOV.UK). It is taxable and uses up most of the personal allowance, so it pushes the effective tax rate on your drawdown up even though the state pension itself arrives gross:
| Combined income | Gross/yr | Income tax | Net/yr | Net/mo |
|---|---|---|---|---|
| 4% drawdown + state pension | £71,973 | £16,221 | £55,752 | £4,646 |
| Level annuity (7.0%) + state pension | £116,973 | £37,616 | £79,357 | £6,613 |
On the combined 4%-plus-state-pension income of £71,973, the marginal rate on the next £1 drawn is 40.0% — worth knowing before taking ad-hoc lump sums on top.
The annuity alternative
An annuity swaps the pot for a guaranteed income for life. At July 2026 rates a healthy 65-year-old buying a single-life level annuity gets about 7.0% — £105,000 a year on this pot — with the best quoted rate at 7.86% (£117,900), per Retirement Line's rate tables; rates are near multi-decade highs on the back of higher gilt yields. The catches: a level annuity never rises, so inflation erodes it; single-life versions stop at death; and the purchase is irreversible. Many retirees mix the two — annuitise enough to cover fixed bills, keep the rest in drawdown.
The 25% tax-free lump sum
From age 55 (57 from April 2028) you can take £268,275 of this pot completely tax-free. Note this is less than a straight 25% of the pot — the Lump Sum Allowance bites at this size, as the next section explains. Taking it all up front is not compulsory: slicing it out gradually (or using UFPLS withdrawals, each 25% tax-free) keeps more money invested in the pension's tax shelter and can smooth your tax bill across years.
£1.5 million: managing the 40% band for life
With £1.5 million, the 4% guideline pays £60,000 — with the state pension, £71,973 gross and £55,752 net, a monthly £4,646 after tax. Roughly a third of the income now sits in the 40% band (marginal rate 40.0%), and the tax-free cash is capped at £268,275 rather than the £375,000 a straight 25% would suggest.
Pots this size are usually managed around thresholds rather than needs. Keeping taxable income under £100,000 avoids the 62% personal-allowance taper; big one-off spends are best funded from the capped-but-large tax-free cash or ISAs rather than taxable drawdown. And estate maths now matters as much as income maths: from 6 April 2027 unused funds are inside the IHT net (Finance Act 2026), and a £1.5m pot can by itself carry an estate past the £2m level where the residence nil-rate band starts to taper away. See our high-earner tax tips for the planning toolkit.
Frequently asked questions
How much income will a £1,500,000 pension pot give me?
On the 4% sustainable-withdrawal guideline, £60,000 a year before tax. A single-life level annuity at 65 would pay roughly £105,000 to £117,900 a year at July 2026 rates (Retirement Line). Adding the full new state pension of £11,973 takes the drawdown route to £71,973 gross, about £55,752 after tax.
How much tax-free cash can I take from £1,500,000?
£268,275 — the Lump Sum Allowance. A quarter of this pot would be £375,000, but tax-free cash is capped at £268,275 regardless of pot size (GOV.UK); the rest of any withdrawal is taxed as income.
Do I pay National Insurance on pension income?
No. Pension income (drawdown, annuities and the state pension) is subject to income tax but not National Insurance — so a retiree keeps more of the same gross income than a worker does.
Is the 4% rule safe in the UK?
It is a guideline, not a guarantee. It comes from US research (William Bengen, 1994) assuming a 30-year retirement and a US portfolio; UK studies often suggest slightly lower safe rates for cautious investors. Flexible spending — cutting withdrawals after bad market years — materially improves the odds.
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