It’s Not Just How Much You Save — It’s How You Spend It

For years, retirement planning has been dominated by a single question: have you saved enough? A recent joint report from Hargreaves Lansdown and Oxford Economics makes the case that this is only half the story. How you draw an income from what you have saved — which withdrawal method you choose, how you handle your tax-free lump sum, and whether your spending assumptions actually match real retiree behaviour — can be just as decisive for your financial security as the total sitting in your pension. Here is what the research found, and what it means for anyone approaching or already living through retirement.

The Headline Finding: Essentials Are Largely Covered

The research paints a reassuring picture on one key measure: around 92% of households with a defined-contribution pension can cover their expected essential living costs in retirement — housing, utilities, food, transport, and clothing — by combining the State Pension with an inflation-linked annuity bought from their pension pot.

That coverage is not evenly spread. It rises to about 95% for the lowest-income households, because the State Pension alone meets most of their essential costs, and dips to roughly 87% for the highest earners, whose essential spending is simply larger. For renters it sits at around 89%, reflecting the housing costs they carry into retirement that most homeowners do not.

The report’s wider point is that the State Pension, combined with more than a decade of auto-enrolment, has built a genuinely solid foundation — and that ever-rising industry “adequacy” benchmarks can leave people feeling like they are failing when, measured against how retired households actually spend, many are on track. But covering the essentials is a baseline, not a finished plan; the report’s more interesting findings sit in the choices retirees make about how to draw down the rest.

Modelling your own essentials-versus-discretionary split, rather than relying on a population average, is one of the most useful exercises you can do before you retire. Wealth365’s financial planning tools let you separate fixed costs from discretionary spending and see exactly how much headroom your plan actually has.

Your Withdrawal Strategy Can Swing the Outcome by 14 Percentage Points

One of the report’s clearest messages is that there is no single “right” way to draw a retirement income — and that the method you pick changes the odds enormously. When the researchers modelled how likely households were to meet their total expected spending (essentials plus the discretionary spending that makes retirement enjoyable), the share on track swung by around 14 percentage points depending on the strategy chosen:

• The 4% rule — 56% on track. Withdraw around 4% of the pot in the first year (on a £100,000 pot, that is £4,000) and adjust for inflation thereafter. It is the most cautious approach and guards against running out of money, but it constrains spending throughout retirement.
• An inflation-linked annuity at 67 — 61–62% on track. Pooling longevity risk lets a provider pay a more sustainable income than cautious self-managed drawdown, at the cost of flexibility and any residual value to pass on.
• A hybrid approach — 64% on track. Drawdown through the active early years to around age 74, then an inflation-linked annuity from 75. Flexible spending when you are fit and healthy, guaranteed income later — the report’s preferred “sweet spot,” though it demands good timing.
• Aggressive full drawdown to 87 — 70% on track, with a catch. Keeping the whole pot invested and spending freely scores well on paper, but live beyond 87 and you may be left relying on the State Pension alone.
• A level (non-inflation-linked) annuity at 67 — 72% on track initially. The highest starting figure, but a fixed nominal income loses purchasing power every year, squeezing later-life living standards.

None of these is objectively superior: the right choice depends on your other income, your appetite for risk, your health, and how much you value flexibility versus certainty. The report leans towards the hybrid model precisely because it draws down when spending is highest and locks in inflation-protected income for later life. Running the numbers under each approach, using your own figures rather than generic assumptions, is the only reliable way to see how each plays out over a 20- or 30-year retirement. Our scenario and projection tools let you stress-test drawdown, annuitisation, and hybrid strategies side by side against your actual plan.

Retirement Spending Falls More Slowly Than Most People Expect

A persistent assumption in retirement planning is that spending drops sharply as people age. Snapshot comparisons appear to confirm it: outgoings look around 20% lower for households aged 75–87 than for those aged 65–74. The report shows most of that gap is a statistical illusion — older generations simply had lower lifetime incomes. Track the same households over time and the decline is far gentler: roughly 5.3% for high-earning households between early and later retirement, and just 2.1% for lower earners, whose budgets are dominated by essentials they cannot cut.

There are two practical consequences. First, do not build your plan on the assumption that your spending will fall off a cliff at 75 — for most people it does not. Second, because spending falls more slowly than inflation erodes money, a level annuity that comfortably covers your needs at 67 may well fail to cover them at 80.

The pattern also varies by household. Couples tend to see bigger declines than single people, because shared essential costs leave more discretionary spending to trim, while renters spend less overall but have less flexibility, since more of their budget is locked into essentials. The takeaway is to build your income plan around your own likely spending trajectory and revisit it periodically, rather than trusting a generic downward-sloping curve.

The Tax-Free Lump Sum: A Decision, Not a Default

Most defined-contribution savers can take up to 25% of their pot as a tax-free lump sum, generally capped at £268,275. The report highlights how casually this enormous decision is often made: FCA data shows nearly half of people accessing a DC pension put the cash towards a large one-off expense, and around 42% simply park it in a current account or cash savings.

The modelling puts a number on the cost. Spending the lump sum rather than keeping it invested to generate retirement income cuts the share of households on track to meet their total expected spending by around 8 percentage points across strategies — and by roughly 10 percentage points for higher earners, who lean more heavily on private pension wealth and less on the State Pension.

That does not make taking your lump sum wrong — clearing an expensive mortgage or costly debt can be a sound move. But it is one of the largest and most irreversible financial decisions most people ever make, and it deserves the same scrutiny as the withdrawal strategy itself: how much tax-free cash you take, and when, directly changes the size of the pot left to fund your chosen income method.

Annuity Rates Have Improved — But Shopping Around Still Matters

Annuity income has become noticeably more attractive as interest rates have risen from their post-financial-crisis lows, and timing matters more than many people realise. The report cites best-buy figures for an inflation-linked (RPI) single-life annuity: a £100,000 pot buys an income of about £5,732 a year if purchased at 67, rising to roughly £7,647 a year if the same pot is used to buy at 75. Because a provider expects to pay out for fewer years the later you buy, delaying the purchase lifts the guaranteed income — one reason the report favours securing inflation-protected income for later life rather than at the very start of retirement.

Where you buy matters as much as when. Best-buy rates vary substantially between providers, and taking the first quote your existing pension company offers — rather than shopping the whole market through the open-market option — is one of the most costly mistakes a retiree can make, potentially surrendering thousands of pounds of income over a retirement.

Health and lifestyle disclosures also matter more than most people expect: conditions such as high blood pressure, diabetes, or a history of smoking can qualify you for an enhanced annuity paying a higher income than a standard rate, simply because the insurer expects a shorter average payout period.

Building a Withdrawal Strategy That Fits You

Taken together, the report’s findings argue for a shift in how retirement planning is framed: the saving phase gets you to the starting line, but the spending phase is where the plan is actually tested, year after year, against real costs, real markets, and a real lifespan that nobody can predict in advance.

A sensible starting point is to separate essential costs from discretionary spending, decide how much of your essential spending you want covered by a guaranteed income versus flexible drawdown, and revisit that split as your circumstances change. For anyone with a defined-benefit pension, multiple pots, a spouse’s pension to factor in, or meaningful Inheritance Tax exposure on unused pension funds, the interactions between these choices can get complicated quickly — which is exactly the kind of situation where speaking to a regulated financial adviser pays for itself many times over.

The core lesson from this research is a simple one, even if the underlying decisions are not: a large pension pot is not, by itself, a retirement plan. How you spend it is.