What £1,250,000 pays under the 4% guideline
The most widely used planning yardstick for turning a pot into income is the 4% guideline, popularised by US financial planner William Bengen's 1994 research: draw 4% of the pot in year one and adjust for inflation, and a balanced portfolio has historically lasted a 30-year retirement. On £1,250,000, that is £50,000 a year (£4,167 a month) before tax. It is a guideline rather than a promise — UK research often lands slightly below 4% for cautious portfolios — but it anchors the comparison below.
| Strategy | Gross income/yr | Income tax | Net/yr | Net/mo |
|---|---|---|---|---|
| 4% drawdown on the whole pot | £50,000 | £7,486 | £42,514 | £3,543 |
| Take tax-free cash (£268,275), then 4% of the rest | £39,269 | £5,340 | £33,929 | £2,827 |
| Level annuity on the whole pot (7.0%) | £87,500 | £22,432 | £65,068 | £5,422 |
| Take tax-free cash, annuity on the rest (7.0%) | £68,721 | £14,920 | £53,801 | £4,483 |
Annuity figures use a typical single-life, level rate at age 65 of 7.0% — Retirement Line's July 2026 tables quote a best rate of 7.86% (Aviva) and Which? cites around £7,000 per £100,000. Annuity quotes are personalised; these are illustrations, not advice.
How the income is taxed
Drawdown income and annuity payments are taxed as ordinary income against 2025/26 bands (thresholds frozen to 2028): nothing on the first £12,570, 20% to £50,270, 40% above. Crucially, pension income pays no National Insurance — on £61,973 of gross income, a worker would lose £3,250 to NI that a retiree simply keeps. Drawing £50,000 from this pot with no other income leaves £42,514 net; the tax numbers change once the state pension joins.
Adding the state pension
The full new state pension is £11,973 a year (£230.25 a week) in 2025/26 (GOV.UK). It is taxable and uses up most of the personal allowance, so it pushes the effective tax rate on your drawdown up even though the state pension itself arrives gross:
| Combined income | Gross/yr | Income tax | Net/yr | Net/mo |
|---|---|---|---|---|
| 4% drawdown + state pension | £61,973 | £12,221 | £49,752 | £4,146 |
| Level annuity (7.0%) + state pension | £99,473 | £27,221 | £72,252 | £6,021 |
On the combined 4%-plus-state-pension income of £61,973, the marginal rate on the next £1 drawn is 40.0% — worth knowing before taking ad-hoc lump sums on top.
The annuity alternative
An annuity swaps the pot for a guaranteed income for life. At July 2026 rates a healthy 65-year-old buying a single-life level annuity gets about 7.0% — £87,500 a year on this pot — with the best quoted rate at 7.86% (£98,250), per Retirement Line's rate tables; rates are near multi-decade highs on the back of higher gilt yields. The catches: a level annuity never rises, so inflation erodes it; single-life versions stop at death; and the purchase is irreversible. Many retirees mix the two — annuitise enough to cover fixed bills, keep the rest in drawdown.
The 25% tax-free lump sum
From age 55 (57 from April 2028) you can take £268,275 of this pot completely tax-free. Note this is less than a straight 25% of the pot — the Lump Sum Allowance bites at this size, as the next section explains. Taking it all up front is not compulsory: slicing it out gradually (or using UFPLS withdrawals, each 25% tax-free) keeps more money invested in the pension's tax shelter and can smooth your tax bill across years.
£1.25m: the first pot where tax-free cash is capped
This is the first pot on these pages to hit the lump-sum ceiling. A quarter of £1,250,000 would be £312,500, but the Lump Sum Allowance caps tax-free cash at £268,275 (GOV.UK / MoneyHelper) — £44,225 of what looks like "your 25%" is actually taxable if drawn. Above £1,073,100 of pot, every additional pound of savings adds nothing to the tax-free entitlement.
The income picture: 4% drawdown is £50,000, and with the state pension the total of £61,973 puts a meaningful slice into the 40% band — the marginal rate on the next £1 is 40.0%, and net income is £49,752. Beware ad-hoc large withdrawals: pulling an extra £40,000 for a house purchase in one tax year would push income past £100,000, where the personal-allowance taper creates the 62% marginal zone. Spreading big withdrawals across tax years is the easy fix.
Frequently asked questions
How much income will a £1,250,000 pension pot give me?
On the 4% sustainable-withdrawal guideline, £50,000 a year before tax. A single-life level annuity at 65 would pay roughly £87,500 to £98,250 a year at July 2026 rates (Retirement Line). Adding the full new state pension of £11,973 takes the drawdown route to £61,973 gross, about £49,752 after tax.
How much tax-free cash can I take from £1,250,000?
£268,275 — the Lump Sum Allowance. A quarter of this pot would be £312,500, but tax-free cash is capped at £268,275 regardless of pot size (GOV.UK); the rest of any withdrawal is taxed as income.
Do I pay National Insurance on pension income?
No. Pension income (drawdown, annuities and the state pension) is subject to income tax but not National Insurance — so a retiree keeps more of the same gross income than a worker does.
Is the 4% rule safe in the UK?
It is a guideline, not a guarantee. It comes from US research (William Bengen, 1994) assuming a 30-year retirement and a US portfolio; UK studies often suggest slightly lower safe rates for cautious investors. Flexible spending — cutting withdrawals after bad market years — materially improves the odds.
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