What £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 £500,000, that is £20,000 a year (£1,667 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 | £20,000 | £1,486 | £18,514 | £1,543 |
| Take tax-free cash (£125,000), then 4% of the rest | £15,000 | £486 | £14,514 | £1,210 |
| Level annuity on the whole pot (7.0%) | £35,000 | £4,486 | £30,514 | £2,543 |
| Take tax-free cash, annuity on the rest (7.0%) | £26,250 | £2,736 | £23,514 | £1,960 |
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 £31,973 of gross income, a worker would lose £1,552 to NI that a retiree simply keeps. Drawing £20,000 from this pot with no other income leaves £18,514 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 | £31,973 | £3,881 | £28,092 | £2,341 |
| Level annuity (7.0%) + state pension | £46,973 | £6,881 | £40,092 | £3,341 |
On the combined 4%-plus-state-pension income of £31,973, the marginal rate on the next £1 drawn is 20.0% — 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% — £35,000 a year on this pot — with the best quoted rate at 7.86% (£39,300), 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 £125,000 of this pot completely tax-free. That is 25% of the pot, within the £268,275 Lump Sum Allowance cap. 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.
The £500,000 pot: replacing a median salary
Half a million is the pot size where retirement income starts to resemble a full working wage. Drawdown at 4% plus the state pension comes to £31,973 gross, which nets down to £28,092 — within touching distance of the £28,720 a worker on the UK median salary of about £35,000 takes home in 2025/26. In take-home terms, £500,000 plus a full NI record effectively replaces the median pay packet, for life.
The tax treatment is friendlier than a salary's, too: pension income pays no National Insurance, so the same gross income keeps more of itself — and the £125,000 of tax-free cash is on top. The strategic question at this size is sequencing: draw harder early (the "go-go years") and let spending taper, or hold 4% steady? The 4% guideline came from US research by William Bengen assuming a 30-year retirement; it is a planning yardstick, not a guarantee, and UK studies tend to land a little lower for cautious portfolios.
Frequently asked questions
How much income will a £500,000 pension pot give me?
On the 4% sustainable-withdrawal guideline, £20,000 a year before tax. A single-life level annuity at 65 would pay roughly £35,000 to £39,300 a year at July 2026 rates (Retirement Line). Adding the full new state pension of £11,973 takes the drawdown route to £31,973 gross, about £28,092 after tax.
How much tax-free cash can I take from £500,000?
£125,000 — 25% of the pot, comfortably within the £268,275 Lump Sum Allowance. You can take it in one go or in slices alongside taxable withdrawals.
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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