Income in later life is the new retirement narrative

Retirement is no longer just about accumulating wealth. Cashflow planning and sustainable income are becoming central to modern investing. Our special contributor and Daily Telegraph columnist David Stevenson explores more.

My maternal grandmother always pulled me aside every Saturday morning when I visited her in an old folks’ home and warned me that the more you have, the more you worry about keeping it. At the time, as a teenager, I thought she was referring solely to my earnings from my reasonably well-paid Saturday job, but I now realise she was revealing, in a cryptic way, a truth for modern society. 

We may not acknowledge it, but we are immeasurably wealthier as a society than ever before, especially those over 40, but with greater wealth comes a crushing concern. We’ll live longer – hurrah – but we’ll also spend more money precisely because we’ll live longer – grumble – and thus the preservation of wealth and the adjacent question of how to draw down that wealth in our retirement has become incredibly acute.

This concern is especially acute amongst the 45 to 54 age group, where one study found that 70% fretted over insufficient savings even though they were at peak earnings. And in case you think it’s a peculiarly British or European problem, ponder the recent data release by Apollo Chief Economist Dr Torsten Slok, who revealed that nearly “half of working-age Americans don’t have a retirement account, with the shortfall most acute among younger, less-educated and lower-income workers”. Presumably, amongst these poorer Americans, generating income in retirement takes second place to simply amassing more capital to start retirement.

Back in the UK, a 2024 study by wealth firm Rathbones found that nearly half of UK adults worry their money may not last through retirement. The UK government’s own data shows the average weekly income for a single pensioner is only about £282, roughly £14,664 a year, which is hardly a king’s ransom for the twilight years of your life.

Around three in four of the working-age population are projected to have a pension income below the PLSA moderate standard – the benchmark set by the Pensions and Lifetime Savings Association for what is considered a reasonably comfortable retirement lifestyle in the UK, and 91% are projected to fall short of the comfortable standard. 

Another data point is that between 2025 and 2060, over half of defined contribution (DC) pension savers, some 54%, are projected to enter retirement either undersaved or financially struggling, with the peak crisis period coming in the early 2040s, when nearly three in five new DC retirees will fall into these categories. Phoenix Insights, which modelled these figures in conjunction with Frontier Economics, estimates that this represents 2.67m people entering retirement in that single window, either expecting a better outcome than they will receive or falling below even the minimum living standard.

These concerns about financial security coincide with major structural changes in the savings and tax wrapper market. The shift from defined benefit to defined contribution pensions has transferred the investment, longevity, and sequencing risks entirely onto the individual. Whereas previous generations could rely on a guaranteed monthly income from their employer’s defined benefit scheme for life, as is still the case in the public sector, today’s retiree faces a fundamentally different challenge how to convert a lump sum of accumulated savings into a dependable income stream that lasts potentially three decades or more.

And if all this wasn’t bad enough, there are other concerns bubbling away. Take the disjuncture between the variability of market returns and the need for dependable retirement income. 

Then there’s the constant challenge of inflation eroding your real purchasing power – and remember that the UK tends to suffer from more persistent, higher inflation rates than our G7 peers. 

And then there is the ever-changing landscape of UK tax policy – with frozen income tax thresholds expected to continue dragging more people into higher bands – which means future net income is uncertain.

Not surprisingly, many investors find this retirement-income environment deeply confusing. Before we begin to sketch out a solution that includes pointy-head terms such as cash flow planning, Safemax, and dividend harvesting, let’s start by nailing down the numbers that matter, beginning with how long you plan to survive on income, i.e., the longevity challenge.

Increasing longevity – a blessing and a curse!

Life expectancy at age 65 in the UK is currently 21.2 years for females and 18.7 years for males. Cohort projections, which account for anticipated future improvements in mortality, paint an even longer picture people aged 65 in 2023 can expect to live an additional 19.8 years for males and 22.5 years for females.

Put simply, someone retiring at 65 today should be planning for a financial runway of at least 20 to 25 years, and arguably more. The number of centenarians in the UK has doubled since 2004, reaching 16,600 in 2024. The tails of the distribution matter enormously in retirement planning even if the average retiree lives to their mid-80s, a meaningful proportion will reach 90 or beyond. Planning for the average is planning to fail for a significant portion of the population.

Life Expectancy at Age 65 in the UK (Cohort Projections)

Source Office for National Statistics, National Life Tables UK 2021–2023 and Past and Projected Cohort Life Tables 2022-based, published 2025. Cohort projections account for future improvements in mortality.

UK Longevity Probabilities (ONS)

Source Office for National Statistics (ONS) Cohort Life Expectancy Tables, UK.

How much is enough?

The Pensions and Lifetime Savings Association’s Retirement Living Standards report has become the closest thing the UK has to a bible for retirement income needs. Their 2025 update sets out three tiers of retirement lifestyle, calculated by researchers at Loughborough University, that give investors something tangible to plan against.

Table 2 PLSA Retirement Living Standards 2025 (Annual Expenditure, Outside London)

Source PLSA Retirement Living Standards 2025 update, calculated by the Centre for Research in Social Policy at Loughborough University. Figures represent annual expenditure after tax, not gross income. London residents should add £1,300–£3,200 per year depending on standard.

Remember that the full State Pension for 2025/26 is £11,973 per year. That means two people, each receiving a full State Pension, can jointly cover the minimum standard, but a single person falls about £1,400 a year short of the minimum, even before any discretionary spending. 

Moving up the scale, single pensioners seeking a moderate retirement standard need an after-tax income of £31,300 per year. Funding that via an annuity on top of the State Pension would require an accumulated pot of around £500,000 in capital. And even that number doesn’t guarantee a luxurious existence.

Research by a firm called Saltus among individuals with more than £250,000 in assets found that respondents believed an average pension pot of about £663,000 would be sufficient for a “comfortable” retirement. Their own modelling, however, indicated that to maintain that comfort level once inflation is factored in, a pot of at least £1.5 million is needed, rising to £2.5 million for younger cohorts.

Income vs capital growth the rise of cashflow planning

Many investors fall into what economists call the stock/flow argument. They focus on the stock of capital, i.e., their accumulated wealth. This stock of capital is crucial, but it’s not enough on its own, as you also need to understand how that capital will flow back to you. This is where something called cash flow planning, a dominant component of financial planning, comes in.

But first, back to that ‘capital stock’ bit of the equation. Yes, targeting a big number like half a million is important, but there’s always the risk of what’s called sequence-of-returns risk. If a major market downturn hits in the first two or three years after you retire and you are simultaneously drawing income from your portfolio, the double impact of falling values and ongoing withdrawals can permanently impair your pot in a way that a later recovery cannot fully repair. Someone who retires into a market that falls by 30% and withdraws 5% of their original pot each year faces a bleak future, as the capital stock diminishes quickly.

You also need to remember that capital gains are episodic and unpredictable, while living expenses are persistent and predictable. Second, the UK tax system increasingly pushes investors to think in terms of income and withdrawals rather than pure gains. Capital gains tax (CGT) allowances have been cut sharply, while investors’ relief has been scaled back, and CGT rates on shares have risen in recent Budgets, with higher rates of 18% and 24% now applying depending on income level. The annual CGT exemption is only around £3,000 in 2024/25, which means large one‑off disposals to realise gains can be surprisingly expensive.

These factors prompt investors to consider the flow of income, leading many to adopt a more flexible approach, with income drawdown as a core component. The Financial Conduct Authority (FCA)’s most recent retirement income market data, covering April 2024 to March 2025, shows that sales of drawdown policies jumped 25.5% year-on-year to 349,992, while the overall value of money withdrawn from pension pots surged 35.9% to £70.9bn. More people than ever are accessing their pensions through flexible drawdown, placing the burden of income planning squarely on them, often without professional guidance. Only 30.6% of pension plans accessed for the first time in 2024/25 were accessed by plan holders who took regulated advice.

This is where cash flow planning comes in. Modern cash‑flow planning tools used by UK advisers and planners typically project your income, assets, spending and taxes over a 20‑ to 40‑year horizon, running multiple scenarios for returns and inflation.

The FCA has made clear that many firms use cash‑flow modelling as a central tool in retirement income planning, and they view it as a key step in providing useful advice. The FCA also highlights that when clients understand these models are built on assumptions rather than guaranteed forecasts, they are less likely to withdraw more than they can afford during periods of market stress. 

Investors also need to consider how their income will flow in retirement and how it will adapt, change, and evolve. Retirement spending typically follows what planners call a “smile” shape. In the early years, often called the “go-go” phase, spending is relatively high because people are active, travelling, and pursuing leisure. In the middle years, the “slow-go” phase, spending tends to moderate as activity naturally decreases. In later life, the “no-go” phase, spending on leisure falls but healthcare and care costs can rise sharply and unpredictably. A plan that simply assumes flat expenditure over a 25-year horizon may not work.

Why withdrawal rate discipline matters – Illustrative pot longevity

Source Illustrative modelling based on standard depletion calculations. Assumes steady real net return of 3% after inflation and charges. Does not account for sequencing risk, which would reduce the figures for higher withdrawal rates in down-market scenarios. UK advisers typically recommend 3.5% as a sustainable starting withdrawal rate for a 30-year horizon.

Tax wrappers, dividends and Safemax concept

One approach to this complicated terrain of income and cash flow planning is to adopt a flexible approach that works around the various tax wrappers. 

Investors might be advised to use annuities or other guaranteed-income products to cover fixed, essential costs, and use drawdown for discretionary spending and flexibility.

Looking at tax wrappers, you might, for instance, pay for your basic needs from the State Pension and a SIPP (Self-Invested Personal Pension), using your tax-free allowance. Any additional discretionary spending can be drawn from an ISA, which is entirely tax-free. This keeps you below higher-rate tax thresholds.

Moving back to investment strategy itself, I’d conclude with a practical suggestion think seriously about dividend harvesting. More adventurous investors, with greater knowledge of the financial markets, use corporate cash flows via dividends paid to investors – again using their ISA and SIPP wrappers. 

Dividends have been steadily rising globally for decades. According to Capital Group, global dividends hit a third-quarter record of $519bn (£379bn) last year, with a bumper 6.2pc increase in that quarter alone. Crucially, those dividend payouts are stable – unlike share prices which are volatile – and nearly nine in 10 companies increased payouts or held them steady, according to Capital.

And then there’s something called the Safemax approach, otherwise known as the 4% rule – a rule of thumb that says you can withdraw 4% of your retirement portfolio in the first year, adjust that amount for inflation each year after and not run out of money for at least 30 years. The concept was born in 1994 when William Bengen, the financial planner, published a landmark study analysing historical market data dating back to 1926. He found that even if you retired at the absolute worst possible moment – just before the Great Depression or the stagflation of the 1970s – a 50/50 mix of stocks and bonds would have survived a 30-year retirement with a 4% initial withdrawal rate. For decades, it was the gold standard for US-based retirees seeking income while preserving their accumulated capital. The bad news, though, is that depending on who you talk to, that number in the UK is probably somewhere lower – and quite possibly much, much lower.

A study covering 19 developed countries found that the 4% rule would have failed in about half of them, including major economies such as Japan, France and the UK. Doug Brodie, a financial planner from Chancery Lane, thinks the Safemax in the UK is probably closer to 3% than 4%. Helpfully, that 3 to 4% range aligns with the typical income from dividend-oriented equity funds that invest in UK or global equities.

This has spawned a whole sub-sector of investment trusts that are called “dividend heroes”, defined as funds that have increased their dividend payouts every year for at least the last two decades without fail, even during the pandemic. The average yield on equity income investment trusts varies between 3.5 and 4% per annum, and you still get to keep the upside from owning risky equities.

So, there are lots of options for investors, ranging from cashflow planning to dividend harvesting, and taking in Safemax approaches, but whatever you do, I’d first seek advice and second make intelligent use of all your tax wrappers and allowances.

Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. Investing is usually for the long term, but it depends on the circumstances of each individual. If you are unsure investing is the right choice for you, please seek financial advice.