What income might I get from a £250,000 pension?

Understanding the kind of retirement pot you’re on track to achieve is fundamental to successful pension planning.

But, even if you have a good idea of the amount you have saved, it can be hard to translate that into the income you’ll have to live on when you retire.

Here we’ll try to lay that out in simple terms using an example retirement pot of £250,000. That’s an ambitious amount for most to aim for but will be possible for many.

How much income would it get you, what will affect that, and how can you improve your chances of a better income?

Income options

There are now several possible ways to use retirement savings to generate an income and each has different implications for the income you can achieve. We’re talking here about money saved and invested inside a ‘defined contribution’ pension scheme. That could include workplace schemes or a SIPP (self-invested personal pension).

You can read about the different income options here. These include buying an annuity - the financial product that takes your savings and provides a guaranteed income in return - as well as options that allow you to leave your money invested while you take income from them, including ‘drawdown’ income and lump sums.

Both drawdown and annuity options usually allow you to withdraw 25% of your pension fund tax-free (up to a limit - currently £265,285), with income tax applying on the rest of the fund. If taking lump sums, 25% of each withdrawal is tax-free with tax payable on the rest.

And remember - 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. An adviser can help with that.

How much can you expect?

Annuity income works differently from the other income options because you have to give up your savings in order to buy one. The benefits, however, are that the income they pay are guaranteed for life and that, sometimes, rates in financial markets which influence annuity returns can mean a higher regular income.

With a pension pot of £250,000, a tax-free amount of £62,500 could be taken and the remaining £187,500 used to buy an annuity. At current rates, the annuity would generate an income of £9,525, based on an individual aged 65 and with a 3% increase in payments each year to mitigate inflation.¹

To compare that with income from drawdown requires you apply a withdrawal rate to your fund - the proportion which can be withdrawn each year to give you the maximum income possible while allowing your fund to last as long as you need it. It isn’t always easy to do because investment returns mean the value of your pot will rise and fall in ways that are not predictable. It’s also impossible to say exactly how long you will live.

Thankfully, a lot of work has been done to work out a sustainable rate of withdrawals based on analysing thousands of possible market scenarios. It has resulted in the ‘4% rule’ - the conclusion that 4% annual withdrawals, updated each year with inflation, have been very likely to let your money last for at least 30 years.²

In the example of a £250,000 fund, assuming £62,500 (25%) was withdrawn tax-free, the remaining £187,500 would generate a regular annual income of £7,500, based on a 4% withdrawal rate.

Of course, in the case of both annuities and drawdown, it would be possible to bolster income levels further by using tax-free cash for this purpose.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP and tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). It's important to understand that pension transfers are a complex area and may not be suitable for everyone. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.