What £2,000,000 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 £2,000,000, that is £80,000 a year (£6,667 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 | £80,000 | £19,432 | £60,568 | £5,047 |
| Take tax-free cash (£268,275), then 4% of the rest | £69,269 | £15,140 | £54,129 | £4,511 |
| Level annuity on the whole pot (7.0%) | £140,000 | £49,203 | £90,797 | £7,566 |
| Take tax-free cash, annuity on the rest (7.0%) | £121,221 | £40,165 | £81,056 | £6,755 |
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 2026/27 bands (thresholds frozen until April 2031): nothing on the first £12,570, 20% to £50,270, 40% above. Crucially, pension income pays no National Insurance — on £92,548 of gross income, a worker would lose £3,862 to NI that a retiree simply keeps. Drawing £80,000 from this pot with no other income leaves £60,568 net; the tax numbers change once the state pension joins.
Adding the state pension
The full new state pension is £12,548 a year (£241.30 a week) in 2026/27 (GOV.UK). It is taxable and uses up all but £22 of the £12,570 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 | £92,548 | £24,451 | £68,097 | £5,675 |
| Level annuity (7.0%) + state pension | £152,548 | £54,849 | £97,698 | £8,142 |
On the combined 4%-plus-state-pension income of £92,548, 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% — £140,000 a year on this pot — with the best quoted rate at 7.86% (£157,200), 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.
£2 million: a pension that behaves like an estate
A £2,000,000 pot generates £80,000 at the 4% guideline — £92,548 with the state pension, netting £68,097 after tax with a 40.0% marginal rate. That gross figure sits only £7,452 short of the £100,000 personal-allowance taper, so any extra drawing tips income into the 60% marginal zone between £100,000 and £125,140 (not the 62% a salary faces: pension income pays no NI). At this scale you manage withdrawals the way high earners manage salary: around thresholds, with the same toolkit.
Two ceilings bite hard. Tax-free cash is capped at £268,275 — just 13.4% of this pot, not 25%. And from 6 April 2027 unused pension funds count for inheritance tax (Finance Act 2026): a £2m pension alone reaches the estate level where the residence nil-rate band tapers away at an effective 60% marginal IHT rate. For many £2m-pot households the optimal plan flips from "preserve the pension" to "draw and gift steadily" — the opposite of the pre-2027 orthodoxy. Bespoke advice earns its fee here.
Frequently asked questions
How much income will a £2,000,000 pension pot give me?
On the 4% sustainable-withdrawal guideline, £80,000 a year before tax. A single-life level annuity at 65 would pay roughly £140,000 to £157,200 a year at July 2026 rates (Retirement Line). Adding the full new state pension of £12,548 takes the drawdown route to £92,548 gross, about £68,097 after tax.
How much tax-free cash can I take from £2,000,000?
£268,275 — the Lump Sum Allowance. A quarter of this pot would be £500,000, 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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