The high cost of living means it remains crucial to have a large pension pot to prepare for retirement and ensure you have enough to fund your golden years.
UK inflation may no longer be in the double digits but it remains high amid rising energy bills and geopolitical tensions as well as Donald Trump’s trade tariffs.
There is also uncertainty about the future of the state pension and the triple lock, meaning it is unclear if you will have these payments to fall back on when you are ready to retire. It is therefore important to prepare yourself financially.
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It is hard to predict what your pension pot will be worth in the future after decades of saving for retirement, especially with volatility in recent years, but knowing how much income you can generate can help you plan and set a target for your golden years.
“One of the big questions when considering retirement planning is how much you are likely to need,” says James Corcoran, chartered financial planner at Lumin Wealth. “None of us have a crystal ball and there are some big unknown factors, such as how long you are going to live, whether you may need long-term care, and what type of support you may wish to provide to family members.
“However, with financial planning, what we will typically do is look at various scenarios to see whether people are on the right track for the retirement they want, and then see how we can help them achieve that. Cashflow forecasting can be a very helpful tool here.”
Can you retire on £250,000?
The cost of living is high for everyone and retirees have also seen their expenses rise.
According to the Pensions and Lifetime Savings Association (PLSA), it now costs £43,900 a year on average for a single person to cover the expenses for a typical comfortable retirement, up £800 from 2024.
Living expenses for a two-person household seeking a “comfortable” lifestyle have increased from £59,000 to £60,600 a year, according to the PLSA.
But people often underestimate how much money they need to put aside to be able to enjoy a decent retirement living standard, warns Joshua Gerstler, chartered financial planner at The Orchard Practice.
“Most couples will now enjoy a three-decade retirement so £250,000 is not going to last very long,” he says. “Nowadays, most financial advisers will create a bespoke lifetime cashflow for you to work out how much you are going to need in retirement and how much you should invest to be able to achieve this.”
Corcoran adds that the full new state pension will provide a financial boost in retirement, worth £11,973 this year, while retirees may have other sources of income such as a buy-to-let portfolio.
“The pathway to retirement is no longer typical,” he says. “It is rare that someone works up to state pension age and then just retires. Many people will have a mix of different careers and income streams.”
See how your pension pot compares to your peers in our “average pension pot by age” guide.
Here is how much retirement income you could generate from a £250,000 pension pot based on the latest annuity rates and drawdown strategies.
What income can you get from a £250,000 pension pot?
There are a couple of different ways to access your pension fund when you retire. You could secure a fixed income for life through an annuity or stay invested and make regular withdrawals through pension drawdown.
“Annuities offer simplicity and a fixed income but lack flexibility,” says David Gibb, chartered financial planner at Quilter Cheviot.
“In contrast, drawdown provides complexity and flexibility, with a quarter of the withdrawal being tax-free and the remainder taxable.”
However, he warns that those who opt for drawdown and take taxable income are limited to a £4,000 annual pension contribution under the Money Purchase Annual Allowance if they ever wish to resume paying into their pension. Meanwhile, once you take an annuity, you can’t get that money back. So it is important to be sure that you are ready to retire before you raid your pension pot.
1. How much annuity does £250,000 buy?
Annuity rates have hit record highs off the back of interest rate rises in recent years, but the products may start becoming less attractive as interest rates are being cut.
If you take this option, your pension pot is used to purchase an annuity that generates a fixed income paid to you for life, linked to your age, health and where you live. The income you generate from a £250,000 pension pot will depend on the rates available at the time as well as your own lifestyle.
Analysis by Quilter Cheviot for MoneyWeek shows that a pension pot of £250,000 could provide a 65-year-old in good health with an annual income of £16,258 based on typical rates of 6.5%.
For smokers, these amounts could increase by approximately £600 due to the associated risks and those with other health issues might see an increase of about £1,000 annually, according to Quilter Cheviot.
It may be worth waiting though as the older you are, the more you could get from annuities. For a 75-year-old, a level annuity could yield £20,227 per year, Quilter Cheviot said.
You can also access 25% of your pension pot tax-free and there may be income tax owed on the annuity payments depending on your total earnings.
2. The pension drawdown route
Annuities may provide certainty but unless you have inflation-linked payments, you can’t increase the payments if your needs change.
An alternative is drawdown, where you keep your pension pot invested and either make regular withdrawals that can change as your expenses do or just access the money when you need it. The main risk is that your pension pot could get depleted and run out if not managed properly, leaving you with a poor income in retirement.
Ed Monk, associate director at Fidelity International, suggests following the “4% rule” for withdrawals. Under this principle, retirees take 4% out of the pot each year while the rest remains invested, hopefully meaning it won’t run out. After taking £62,500 as 25% tax-free cash, you could withdraw income of £7,500 per year based on the 4% rule or £9,375 if you went to 5%. There will be income tax to pay if your withdrawals, along with other earnings, push you into the basic or higher rate tax brackets.
That is becoming more of an issue for pensioners due to frozen tax thresholds and the rising state pension.
While £7,500 in drawdown is lower than the annuity rate, Monk highlights that the pension money remains yours and is available to use as you wish, including as inheritance to pass on after you die.
“Money used to buy an annuity is no longer yours, although some products will guarantee benefits are paid to loved ones after you die,” adds Monk.
“You don’t have to pick just one method of accessing your pension cash – these options can be blended and changed over time to maximise your income tax efficiently."
How to build a £250,000 pension pot
The time it takes to generate a £250,000 pension pot will depend on when you start and when you plan to retire.
If you invested £250 per month for 33 years, assuming a growth rate of 5% per year, you would build up a pot worth approximately £250,000. But you would need around £520 per month if you only had 25 years.
Gibb adds that due to inflation, the future value of £250,000 will be less so to save an equivalent amount in today’s terms, a monthly saving of £880 is necessary.
People often underestimate how much money they need to put aside to be able to enjoy a comfortable retirement, warns Gerstler at The Orchard Practice.
“Most couples will now enjoy a three-decade retirement so £250,000 is not going to last very long,” he says. “Nowadays, most financial advisers will create a bespoke lifetime cashflow for you to work out how much you are going to need in retirement and how much you should invest to be able to achieve this.”
Corcoran adds that the state pension will provide a financial boost in retirement, worth £11,502 this year, while retirees may have other sources of income such as a buy-to-let portfolio.
“The pathway to retirement is no longer typical,” he says. “It is rare that someone works up to state pension age and then just retires. Many people will have a mix of different careers and income streams.”
Don't forget about tax
Even if £250,000 is enough, you need to consider tax, especially with fiscal drag and frozen tax thresholds.
You can take 25% tax-free from your pension and after that, any withdrawals from drawdown or annuity payments are taxed at your marginal rate beyond any personal allowances.
There is a risk that the full new state pension, currently at £11,973, will already push people near the basic rate threshold so any further payments, particularly large withdrawals, could end up pushing you into higher tax brackets.
This could reduce the income you get from your pension pot, meaning you actually need to save more than you thought and plan for giving money to the taxman as well as for yourself.
There are also plans to include pension wealth in a person’s estate for inheritance tax from 2027 so it is also important to work out how much you actually need to save and spend in retirement so you don’t leave your loved ones with a big bill.
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