Pension decumulation: How to avoid key mistakes for your retirement income

“Decumulation” is a term that you may or may not be familiar with, but it is one of the most important financial steps a person can take in their life.

Decumulation is the opposite of accumulation. In essence, decumulation is when you begin to turn the money you’ve been saving in your pension over the last few years (or decades) into a retirement income.

This will usually involve drawing funds from your various pension pots to supplement other sources of income, such as your State Pension. You may also have investments, in ISAs for example, that you wish to decumulate.

Ultimately, the goal in most cases is to have enough money to live the lifestyle you desire.

While this may seem straightforward, making decisions that aren’t suited to your financial plan could have significant and long-lasting consequences.

I want to discuss what these mistakes could be, as well as how to avoid them. Together, we can help make the most of your retirement savings.

Mistake 1: Failing to plan ahead

One of the biggest mistakes people make is failing to plan their decumulation strategy well in advance.

Remember, decumulating your pension fund is unlikely to be a one-time event. Rather, it’s a process that requires careful thought and a long-term approach. By not planning ahead, you could be jeopardising your comfort in retirement, affecting everything from your lifestyle to your ability to stay afloat.

Indeed, the Retirement Living Standards by Pensions UK suggests that a single person needs an annual income of £31,700 to live a “moderate” retirement. This could include luxuries such as taking an annual overseas holiday and eating out a few times a month. The amount required for two people increases to £43,900.

For a comfortable retirement, which allows for more spontaneity and more holidays, a single person would need £43,900, with a couple requiring £60,600.

Keep in mind that these amounts are relevant for 2025 but are likely to increase as the cost of living rises.

Without adequate planning, you might draw too much or too little for your needs, which could not only have significant tax implications but also affect your general standard of living.

Mistake 2: Taking your whole pot at once without doing your research

The Pension Schemes Act 2015 allows people aged 55 and over (rising to 57 in 2028) to access their entire defined contribution (DC) pension pot should they wish. If you have a workplace pension pot (that is not final salary or career average) or a self-invested personal pension (SIPP), these are likely to be DC pots.

While such flexibility can be useful, taking the whole pot as a lump sum might not be the  most suitable choice for your financial plan.

Keep in mind that you will likely have access to your pension commencement lump sum (PCLS). As of the 2025/26 tax year, you can take up to 25% from each of your pensions without paying Income Tax, provided you:

• Take the money as one or more lump sums
• Do not take more than your lump sum allowance (LSA), which is £268,275.

It’s important to note that the LSA applies to all your pensions combined, not to each one.

Your LSA could be higher if you applied for protection before 6 April 2025, when the standard Lifetime Allowance of £1,073,100 was abolished.

While there could be instances where taking a large lump sum may form part of your financial plan, doing so without a holistic view of your entire decumulation strategy could put you at risk of:

Tax implications

The first 25% of any funds you draw from your pension will be tax-free. However, the remaining 75% will be taxed at your marginal rate. So, withdrawing your entire pot at once could push you into a higher Income Tax bracket, leaving you with less disposable income than you might have expected.

Running out of money

The Office for National Statistics (ONS) projects that a 65-year-old man can expect to live a further 19.8 years on average, with a woman of the same age expected to live another 22.5 years. These life expectancies are projected to rise by 2 and 1.9  years respectively by 2047.

With people generally living longer, your pension pot might need to last for two or three decades, perhaps even more.

By not factoring life expectancy into your decumulation strategy, you run the risk of outliving your funds.

Losing wealth in real terms to inflation

Inflation will erode the purchasing power of your money over time , and taking your entire pension out removes the potential it could have for further growth. This could limit your choices later in life.

For example, according to the Bank of England:

• In 1995, a product worth £100 would have cost you £116.26 in 2005.
• £100 worth of goods and services in 2005 would have cost you £128.02 in 2015.
• Something costing £100 in 2015 would cost you £138.43 in June 2025.

So, as the cost of living increases, represented by the rate of inflation, the same amount of money doesn’t stretch as far.

Though drawing a large lump sum from your pension could feel significant now, it may not be enough to support you in 20 years if kept as cash. This is because your money has no way of growing to keep up with the demands of inflation.

Alternatively, leaving what you don’t need invested within your pension could help to preserve your wealth over the course of your retirement.

Mistake 3: Overlooking the importance of professional advice

Professional advice can be a vital tool for anyone navigating the complexities of pension decumulation.

By working together, we could develop a tailored strategy that’s suited to your needs and able to adapt to changing tax rules and regulations.

Remember, decumulation is a process, not a set-and-forget exercise.

Whether you’re pre-retirement or have already started drawing from your pot, seeking professional advice could make it easier to avoid common pension mistakes and increase your chances of living a financially secure and comfortable retirement.

It’s important to take the time to understand your options and make informed decisions. I can help with this.

Email Marnel.Stafford@fosterdenovo.com or call 07305 970959 or 0207 469 2800 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate cashflow planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits.

Pension savings are at risk of being eroded by inflation.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

You should seek advice to understand your options at retirement.