Tips and tricks on how to generate a sustainable monthly income
Kyle Caldwell explains how you can build your own portfolio to provide regular income.
27th January 2026
by Kyle Caldwell from interactive investor
Since the pension freedoms were introduced in April 2015, it’s become increasingly common for individuals to use their pension to pay themselves an income in retirement.
For most people, the aim will be to secure a reliable and regular income from their investments, with the intention of not inflicting too much harm on the capital.
The good news is that for those who arrange their investments carefully, a monthly income can be achieved. There are several ways to go about this, as we explain below.
Doing the sums
First some groundwork needs to be done. The starting point is to calculate what your existing provision will provide, and then compare this against what you need.
To calculate how much income you need to generate, factor in the state pension (if you are at an age where you can claim it), as well as any other assets that can be drawn on in retirement, such as ISAs and, for those who have them, defined benefit pensions.
Once you’ve done all the sums, you can work out the size of your income gap, which will determine the return you need to generate.
How much income you need/would like is a personal decision, depending heavily on lifestyle. However, ‘The Retirement Living Standards’ from Pensions UK are often cited. The calculations show someone living alone would need a pension pot of around £540,000 to £800,000 for a ‘comfortable’ retirement. For couples, the amount would be £300,000 to £460,000 per person.
Bear in mind that this is only an illustration, makes a host of assumptions, and is based on a single person buying an annuity. The figures shown are after tax, so the true amounts would be higher to meet the standards.
It could be that your pot is too small to achieve the target you have in mind, or that it requires stomaching a higher amount of risk than you are comfortable with.
For example, to generate income of £20,000 a year, a pot size of £400,000 would require an investment return of 5%. For larger sums, the dividend yield target would be lower, at 4.5% for £450,000 and 4% for £500,000.
Another thing to bear in mind is that the sooner you retire, the longer you will need your pension pot to stretch to last the course (assuming you choose income drawdown). There’s always the risk of draining your pension too soon if the investments underperform and if withdrawals are overly aggressive.
Another thing to consider is whether to use some of your pot to buy an annuity, which will provide guaranteed income for life. However, bear in mind the amount of income annuities offer tends to become more attractive the older you get. Moreover, buying an annuity is an irreversible decision.
Keeping your money invested at retirement provides more flexibility in terms of how much to withdraw and for estate planning. However, from next April, unspent pension funds will come under the inheritance tax net for the first time following a rule change by the government.
It is also worth remembering that choosing to remain invested at retirement or opting to buy an annuity is not a binary decision – you can do both. You could look to secure a guaranteed income through an annuity to cover a certain amount of expenditure, and then keep the rest invested to take flexibly.
Generate the natural income
There are various ways to arrange investments to pay yourself an income at retirement, with the most obvious being to focus primarily on income-generating assets.
To reduce risk, which is particularly important in retirement, one approach is to draw only the income produced by the underlying investments held in professionally managed funds and investment trusts (the “natural yield”), rather than eating into capital growth.
This is because in a scenario where stock markets fall sharply and income withdrawals are maintained or increased, it is difficult for a retirement fund’s capital value to recover after.
That’s particularly the case if you’re drawing on capital to maintain the required level of income when the market falls (as opposed to taking only the “natural” yield), since reducing the number of fund units you own makes it much harder for the fund to regain value.
For those who continue to draw income from a pension pot at that stage, a vicious cycle is created, resulting in the number of units and value of investments reducing further. The phenomenon is known as pound-cost ravaging, and in the worst-case scenario, this potentially means the pension pot running out before you die.
Is 4% a safe withdrawal rate?
As a rule of thumb, withdrawing 4% a year is potentially considered a safe withdrawal rate. The theory is that by taking this percentage as an income, adjusted annually to account for inflation, retirement pots will potentially last 30 years or more.
However, this rule by no means offers cast-iron certainty. There are many unknown future variables that can impact whether 4% withdrawals will avoid draining your portfolio too soon.
Chief among the problems of this strategy is that investment performance is impossible to accurately predict. If your portfolio gets off to a bad start, continuing to draw 4% could mean your pot drains quicker than planned.
That said, 4% a year isn’t an overly aggressive withdrawal rate. It can certainly be a good starting point, so long as you annually review where you are to make sure any withdrawals are sustainable.
The 4% rule was devised by US financial planner Bill Bengen in 1994. Bengen backtested a portfolio of 50% in US equities and 50% in US bonds over 30-year rolling periods from 1926. He found that withdrawing 4% a year, increasing it in line with inflation, would see the pot size last at least 30 years.
Is 4.7% the new 4%?
Bengen recently published new research that examined whether investors with a more diversified portfolio, containing seven asset classes rather than just shares and bonds, could be more adventurous with how much they withdraw.
This new research (30 years on from the original analysis) suggested that 4.7% is the new safe withdrawal rate. We took a deep dive into this new research in an On The Money podcast episode, which you can watch/listen to here.
However, bear in mind that this isn’t financial advice and is only intended to be food for thought. Ultimately, how much money to withdraw is a personal decision and everyone in retirement has their own set of unique circumstances.
It’s important to regularly review the amount you’re withdrawing to check that it fits with the things you want to do in retirement, and to examine how the investments are performing.
Cash bucket
Having a cash buffer is one way to give a pension portfolio ample time and opportunity to recover.
The idea is to keep roughly two or three years’ worth of expenditure in cash. If a notable stock market slump occurs, withdrawals from your investments can be paused and the cash bucket utilised. This gives the pension portfolio a better chance of recovering because money hasn’t been taken out of it.
If possible, top up the cash, so that you are protected again if further sizeable market falls happen in future.
This cash could be held in a money market fund, which invests in high-quality bonds that are due to mature soon, meaning that investors can get a modest income without taking much investment risk.
In interactive investor’s latest ii Top 50 Fund Index, six money market funds appear in the ranking of the 50 most-bought funds, investment trusts and ETFs in the fourth quarter of 2025.
They are Royal London Short Term Money Market (accumulating)
Royal London Short Term Money Market (distributing)
Amundi Smart Overnight Ret GBP H ETF Acc CSH2
Fidelity Cash Fund, Legal & General Cash Trust and Vanguard Sterling Short-Term Money Market.
Let’s now move on to the different types of fund options to consider, as part of your wider research, on a post-retirement portfolio.
Monthly income funds
The hassle-free route is to focus solely on funds paying a monthly income. Around a decade ago there were only around a couple of dozen funds paying out monthly, but now there’s more than 150.
The downside is that there’s only a small number that solely invest in equities. Most monthly income funds invest in bonds or adopt a multi-asset approach, which means investing in both shares and bonds. For those in retirement, a balanced approach such as this helps to both protect and grow capital.
Bear in mind that some monthly income funds invest solely in, or have big weightings to, high-yield bonds, which is the risker end of the bond market.
With monthly income funds, the amount of income generated is based on the dividends or coupons that the underlying holdings have paid each month. Therefore, the income can vary, but to counteract this, most funds smooth the dividend payments into 12 equal amounts, holding back some income in good months, which is then used to top up leaner periods. Any excess cash left over at the end of the year is handed back to investors.
Two funds endorsed by our fund analyst team that provide monthly income are Man Income and Artemis Monthly Distribution.
Man Income, which has a current yield (as at 23 January 2026) of 4.3%, invests in UK stocks with above-average dividend yields.
Artemis Monthly Distribution, a multi-asset fund, invests around 60% in bonds and 40% in shares, and has a yield of 3.6%.
Mix growth and income strategies
However, it’s prudent to avoid betting the house on income strategies. Given that average life expectancies are in the mid 80s, a pension portfolio also needs exposure to growth-producing assets to strike an appropriate balance.
Having exposure to growth strategies will help give your portfolio greater diversification, and it also reduces exposure to bonds, assuming you can tolerate the higher volatility associated with shares.
Most income funds tend to aim to generate capital growth, as well as income. However, some put more focus on income generation. As ever, it’s a case of looking under the bonnet to find out which approach is being taken.
an investment trust that has raised its dividend every year since 1966, aims to deliver a mixture of growth and income. Since 1991, it’s been managed by Job Curtis, who focuses on dependable dividend payers in the FTSE 100 index. It is regarded as a ‘Steady Eddie’ due to its conservative approach and its yield is currently 3.9%.
Another fund endorsed by our fund analyst team is Artemis Income, which also focuses on UK companies producing excess cash to sustainably pay dividends.
However, there’s a potential downside if you opt for the convenience of taking a regular income from income-producing investments, as those who buy funds focusing more on capital growth could benefit from higher overall total returns.
Yet adopting this approach means the income would need to be achieved by selling fund units rather than relying on income generated from the underlying investments in the fund.
Don’t overthink it, and the case for investment trusts
Selecting funds or investment trusts just because they pay income out in a particular month shouldn’t be the main reason you buy those investments.
Given that most funds and trusts pay quarterly or twice a year, you could manually spread the income produced into regular payments throughout the year. Not focusing solely on when dividends are paid or monthly income funds gives you a much bigger pool to fish in.
One way to achieve a mix of growth and income is to consider investment trusts. As seasoned investors can testify, the investment trust structure can work very well for investors looking for a regular income stream.
This is because one of the advantages of investment trusts is their ability to squirrel away income for a rainy day. Up to 15% of income generated each year from underlying investments can be saved, in what is called revenue reserves. In contrast, funds have to distribute all the income generated by the underlying investments each year.
When there’s a period when income from underlying investments dries up, which happened during the Covid-19 pandemic and the financial crisis, investment trust boards can utilise those reserves and top up shortfalls.
This is why there are an impressive number of “dividend hero” investment trusts, which have raised their dividends year in, year out, for long periods.
Ten dividend heroes – City of London Ord CTY
Caledonia Investments Ord CLDN0
The Global Smaller Companies Trust Ord GSCT0
F&C Investment Trust Ord FCIT0.
have consistently increased payouts for more than 50 years.
Bear in mind that for some dividend heroes, the dividend yield is fairly low, which reflects the trusts’ broad emphasis on growing the capital and raising the payout, rather than offering a high level of income. Also, in the case of Murray Income, it’s worth noting that the trust’s management firm is set to change from Aberdeen to Artemis.
All-out income attack
For those who are happy to prioritise income and are seeking a high income of over 6%, there are fewer options, and they are more adventurous.
For equities, you could consider the small number of funds that artificially boost their dividend yields through a special technique that involves selling derivatives to other investors.
Under this strategy, the fund manager agrees to share any future capital gains with a third party. A fee is paid for the agreement, which creates immediate, up-front income. This can be distributed to fund investors as a stream of income.
The downside is if the fund’s holdings rise in value, as some of that gain goes to whoever bought the derivative. Therefore, such funds lag the pack in rising markets.
However, seeing as the buyer’s paid up front, the risk of not being able to deliver a chunk of extra income is limited.
Three UK equity income funds offering an income boost are Schroder Income Maximiser, Premier Miton Optimum Income and Fidelity Enhanced Income. The trio typically yield between 6% to 7%.
However, as these funds are specialists, they would work better as smaller weightings in a portfolio, and in combination with more conventional funds and investment trusts to deliver a mixture of growth and income.
For bonds, it is the riskier end of the market, high-yield corporate bonds and emerging market debt, that offers the best chance of the highest income.
Elsewhere, some infrastructure funds and investment trusts offer yields above 6%. However, this is a more specialist area and higher risk, resulting in sizeable losses for many names in recent years as interest rate rises hit this investment area.
The idea is to keep roughly two or three years’ worth of expenditure in cash. If a notable stock market slump occurs, withdrawals from your investments can be paused and the cash bucket utilised. This gives the pension portfolio a better chance of recovering because money hasn’t been taken out of it.
If possible, top up the cash, so that you are protected again if further sizeable market falls happen in future.
The elephant in the room is that if the market falls for three years and you use all your cash reserves, you will have to sell shares to withdraw your 4% and also sell shares to top up your cash reserve, all at lower prices.
How low is the gamble.
Leave a Reply