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How far could a £250,000 pension go in retirement?

Recent headlines have highlighted fears that up to 15 million people in the UK aren’t saving enough for their retirement. So how far would a pension pot of £250,000 go if you are planning to retire? Here, Mervyn Casserly, of leading wealth management firm Fairstone, looks at the figures.

A report from the Pension Commission estimating up to 15 million people in the UK haven’t put enough money aside for their retirement grabbed the headlines earlier this month.

It found low and middle earners, the self‑employed and women are most at risk of hitting a 'severe cliff-edge' in their income when they retire.

So, if you’re approaching retirement – or thinking about doing so – how will you know if you have enough put away?

How far could a £250,000 pension pot go?

A £250,000 pension pot may not sound like a life-changing sum, but with careful planning it can go further than many expect.

The key isn’t just the size of the pot, but how it’s used, how income is taken and how it fits alongside other retirement income, such as the state pension.

Understanding the 25 per cent tax-free pension lump sum

Under current pension rules, unless there are any previous protections, most people can usually take up to 25 per cent of their pension as tax‑free. 

This is called the pension commencement lump sum (PCLS).

How much tax-free cash can you take from a £250,000 pension?

For a £250,000 pot, that means:

• £62,500 could be accessed tax‑free at retirement
• £187,500 would remain in the pension

How the remaining pension is used will largely determine the level of income, flexibility and certainty available throughout retirement.

Is taking the full tax‑free lump sum always the right decision?

Being able to take up to 25 per cent of a pension as tax‑free cash is one of the most well‑known benefits and features of pensions.

However, deciding whether to take the full amount and when isn’t straightforward.

I often speak with people approaching retirement who assume they should automatically take the maximum tax‑free lump sum because it’s available.

Whether this is the right decision depends on what the money will be used for, and how it fits into the wider retirement plan.

For some, taking tax‑free cash can serve a very clear purpose. 

This might include:

• Paying off or reducing a remaining mortgage
• Creating a cash reserve to provide peace of mind
• Funding major one‑off expenses, such as home improvements
• Supporting higher spending in the early years of retirement

There are also situations where taking the full tax‑free amount may be less beneficial.

The benefits of not taking the full tax-free lump sum

Leaving funds invested within a pension can allow them to continue growing in a tax‑efficient environment, potentially increasing the long‑term income the pension can provide.

For others, it may make sense to delay taking tax‑free cash, accessing it gradually over time or using it later in retirement when income needs change.

Tax is also an important consideration. 

While the lump sum itself is tax‑free, removing money from a pension reduces the amount available to generate future income and can affect how remaining withdrawals are taxed in later years.

The question isn’t just ‘how much can I take tax‑free?’, but ‘what role will this money play?’

The timing and use of tax‑free cash should align with long‑term objectives, rather than being seen as a default decision.

Using a £250,000 pension to buy a guaranteed income

One option is to convert some or all of the pension into an annuity, which provides a guaranteed income for life.

How annuities work in retirement

At current rates, a healthy 65‑year‑old purchasing a single‑life, level annuity could receive around £14,000-plus per year from the remaining £187,500 pension pot.

How much income could an annuity provide?

The final income depends on several important choices:

• Escalating annuities increase income over time to help offset inflation, but start at a lower level
• Joint‑life annuities continue paying an income to a surviving partner, reducing the initial amount
• Health and lifestyle factors can increase annuity rates significantly

Pros and cons of annuities

Annuities can provide reassurance and simplicity, but once purchased they offer limited flexibility and cannot be changed later.

Taking income through pension drawdown

Another approach is flexi-access drawdown, where pension funds remain invested and income is taken as needed.

What is flexi-access drawdown?

A commonly used planning assumption is a four per cent withdrawal rate. 

Using this as an illustration, four per cent of £187,500 equates to around £7500 per year initially.

The intention of this approach is to allow the pension to continue growing while supporting income over the long term, often planned for 30 years or more.

How much income could drawdown provide?

The ‘four per cent option’ isn’t a rule or guarantee. 

Outcomes are influenced by:

• Investment performance and volatility
• Inflation
• Charges and taxation
• How income levels change over time

Drawdown offers flexibility and potential growth, but also exposes retirees to investment risk and requires regular ongoing reviews.

A hybrid approach: combining guaranteed and flexible income

Many choose a blended approach, combining the strengths of both methods.

This can include:

• Using part of the pension to secure guaranteed income for essential bills and outgoings
• Keeping the remainder invested for flexible spending, lifestyle costs or future needs

Why many retirees choose a blended strategy

This strategy can help balance peace of mind with adaptability, particularly as spending needs often change throughout retirement.

How does a £250,000 pension compare to UK retirement living standards?

The Retirement Living Standards are widely used as a national benchmark to help people understand what different lifestyles in retirement may cost.

They are based on independent research carried out by the Centre for Research in Social Policy at Loughborough University, involving detailed discussions with members of the public across the UK.

These figures represent estimated spending, not income, and they assume retirees own their home outright with no mortgage or rent to pay.

Lifestyle level     Single person         Couple
Minimum           £13,400 a year   £21,600 a year

Moderate          £31,700 a year   £43,900 a year

Comfortable      £43,900 a year  £60,600 a year

What lifestyle could a £250,000 pension support?

A £250,000 pension, when combined with the state pension, can often support a minimum lifestyle.

Achieving a moderate or comfortable lifestyle usually requires additional pensions, savings or other sources of income.

How can a financial adviser help?

Two people with identical pension pots can have very different retirement outcomes.

The key factors in retirement outcomes include:

• Retirement age and timeline
• Health and life expectancy
• Spending patterns and goals
• Inflation and future living costs
• Attitude to investment risk
• Tax position and other assets

How long will your retirement savings last?

As an independent financial adviser, I speak with many people as they approach retirement, and one common theme is how long they expect their savings to last.

With people now living well into their 90s and often beyond, retirement planning increasingly needs to account for three decades or more of income.

Flexibility, sustainability and tax efficiency become just as important as the size of the pension pot itself.

A £250,000 pension pot should not be viewed in isolation. 

When combined with the state pension and structured appropriately, it can play a vital role in supporting a secure retirement.

The value of personalised retirement planning

Understanding the options and how they align with personal circumstances is essential.

Pension and tax rules can change, and there are risks with every approach, which is why personalised financial advice is so valuable when approaching all retirement decisions.

Visit www.fairstone.co.uk or call 0800 884 8040 for advice on how to approach your retirement.

THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, TAX OR LEGAL ADVICE. TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY CHANGE. THE VALUE OF INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY NOT GET BACK THE FULL AMOUNT YOU INVESTED. PAST PERFORMANCE IS ALSO NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE. ALWAYS SEEK PROFESSIONAL ADVICE BEFORE MAKING FINANCIAL DECISIONS.

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