Planning for retirement can be time-consuming, and working out what sort of income your pension may provide you with is part of the process, but this isn’t necessarily straightforward.
If you have a defined contribution pension, also known as a money purchase plan, you’ll be subject to pension freedom rules, which mean you can take your retirement income in various different ways. These include withdrawing an income as and when you need it using a flexible drawdown plan, and/or buying an annuity, or income for life. The amount you end up with in your pot at retirement depends on investment performance and how much has been paid in over the years. Read more in our article What is a defined contribution pension?
Alistair McQueen, Head of Savings and Retirement at Aviva, said: “Pension options at retirement are greater than ever. And the choices we make today could shape our lifestyles for years to come.
“My top three tips are take your time; shop around; and get help. You may have been saving for forty years, so don’t feel pressured to decide your future in 40 minutes.
“There are many providers of retirement products. It often pays to shop around to find the one that is right for you. After all, it’s your money and your retirement. And there is loads of help available. Speak to your pension provider. The government-backed Pension Wise provides free information about your retirement options, and many people choose this time to pay for personal financial advice.”
Here, we break down how much income a pension worth £100,000, £250,000 and £500,000 could give you, depending on whether you choose drawdown or to buy an annuity.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’d like advice on your private pension, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Please note that Fidelius can discuss private pensions, but is not able to advise on the State Pension and defined benefit / final salary (e.g. NHS) pensions.
Your pension options
Before we look at the potential income you can receive from various sized pension pots, it’s worth taking a quick look at the two main options you have: pension drawdown and an annuity. You can read more in our article Your pension options at retirement.
Drawdown
You can take 25% as a tax-free cash lump sum (or in smaller sums over the years) and leave the remainder invested in a flexible pension drawdown plan. You can dip into your flexible drawdown plan whenever you want to provide yourself an income.
However, your money will remain subject to the vagaries of stock markets, so you’ll need to feel comfortable with the level of risk you’re taking with your investments. You also need to remember that if you withdraw too much from your drawdown plan too soon, your money could run out.
A typical rule of thumb is to take up to 4% a year from your pension, giving your investments room to grow and ensuring you’ll have enough money to last you your retirement (although of course the amount you can take out without running out of funds will depend on how big your pension pot is). We’ve used a rate of 4% to assume the amount of income taken from pension pots of various different sizes in the examples below.
Read more in What is pension drawdown and how does it work?
An annuity
In return for handing over some, or all of your pension savings to an insurance company, you’ll be paid a guaranteed income, either for life or a set period of time, from an annuity. Annuity rates are affected by various factors, including the yields on government bonds, known as gilts, and interest rates. As interest rates have risen in recent years, annuity rates have also increased, making them a more attractive option than they previously were.
The amount you’ll receive depends on rates at the time, your age, health, and the type of annuity you want. In the examples below we include the income you’ll receive from a level annuity, which pays the same amount each year for the rest of your life. Remember that annuity rates fluctuate all the time, so even if you have a pension pot that’s the same amount as the examples we’ve used, you’re unlikely to get exactly the same level of income. The annuity rates shown were correct at the time of publishing (13.05.2024).
It’s also important to bear in mind, if you’re a smoker, are overweight, or there are other factors which might shorten your life expectancy, you might be eligible for what’s known as an enhanced annuity. This type of annuity will typically offer you a higher income than other lifetime annuities, as the provider assumes that with a shorter expected lifespan, they will need to make payments for a shorter period of time.
If you want to buy an annuity which provides an income that increases each year (to safeguard against inflation eating into your pension income), you’ll need to buy an inflation-linked annuity. This will mean you’ll receive a lower starting income that will rise over time, unlike a level annuity where your income remains the same over time. Find out more about this kind of annuity in our guide Are inflation-linked annuities good value?
If you want to buy a joint annuity that will pay out to your partner after your death, you’ll need to accept less income than a single person annuity.
Read more in our guides Annuities explained and Five steps to choosing an annuity.
£100,000 pension: how much income could it provide?
Pension drawdown
If you take 25% from your pot as a tax-free cash lump sum, this leaves you with £75,000. If you then chose to move into pension drawdown, and withdraw 4% a year from your pot, this would provide you with an annual income of £3,000 a year, or £250 a month before tax. Together with your full State Pension from age 66 (rising to 68 from 2044), at £11,502 a year in 2024/25, this would provide you with a potential annual income of £14,500 (£1,208 a month). Bear in mind, though, that income withdrawals from your pension are subject to tax at your marginal rate. In this case, you’ll pay basic-rate income tax at 20% on any income above your personal annual allowance of £12,570. In this scenario, your income above this threshold is £1,930, so after tax is deducted, you’d receive £14,114 (£1,176 a month).
If you didn’t take any tax-free cash from your pension pot, you could increase your annual income to £4,000, or £333 a month (at a 4% withdrawal rate), bringing your total income to £15,500 (£1,292 a month, including the State Pension) before tax. Your income after tax in this scenario would be £14,914 (£1,243 a month).
Annuity
If you used your retirement savings to buy an annuity instead, you could exchange your £75,000 pension pot (assuming you’ve taken a £25,000 tax-free lump sum already) to provide you with an income of about £4,939 a year from an annuity at age 66, or £412 a month, according to Aviva’s online annuity calculator. This assumes you’re in good health. If you receive the full State Pension as well, you’ll have a total annual retirement income of £16,439. Again, your annuity income will be subject to tax at your marginal rate. This leaves you with an income of £15,665 a year, after tax is deducted on your income above your personal annual allowance.
Summary
You could receive £250 a month after taking your 25% tax-free cash lump sum from a drawdown plan, or £333 a month if you don’t take any tax-free cash from age 66 (assuming you withdraw 4% of your pot). Alternatively, you could buy an annuity that’ll provide you with £433 a month in income at age 66. These figures are excluding your State Pension entitlement (£958 a month in the 2024/25 tax year assuming you receive the full new State Pension) and before tax.
£150,000 pension: what income could it provide?
Pension drawdown
If you decide to take 25% from your pot as a tax-free cash lump sum, this leaves you with retirement savings of £112,500. If you then chose to move this money into a pension drawdown plan, and withdraw 4% a year from your pot, this would provide you with an annual income of £4,500 a year or £375 a month before tax. Together with your State Pension (if you’re eligible for the full amount) from age 66, at £11,500 a year, this would leave you with an annual income of £16,000 (£1,333 a month). Remember you’ll pay basic-rate income tax at 20% on any income above your personal annual allowance of £12,570. In this scenario, your income above this threshold is £3,430, so after tax is deducted, you’d receive £15,314 (£1,276 a month).
If you didn’t take any tax-free cash from your pension pot, you could increase your pension to £6,000, or £500 a month. Including the full State Pension, this brings your total income to £17,500 (£1,458 a month). Your income after tax in this scenario would be £16,514 (£1,376 a month).
Annuity
You could exchange a £150,000 pension for an income of about £7,434 a year from an annuity at age 66, equivalent to £619.50 a month, according to Aviva’s online annuity calculator, assuming you’re in good health. That’s after taking a tax-free cash lump sum of £37,500 at age 66. If you receive the full State Pension as well, this brings your total annual retirement income to £18,934. Once tax has been deducted on your income above your personal allowance, this leaves you with an income of £17,661 a year.
Summary
You could receive £375 a month after taking your 25% tax-free cash lump sum from a drawdown plan, or £500 if you don’t take any tax-free cash from age 66 (assuming you withdraw 4% of your pot). Alternatively, you could buy an annuity that’ll provide £619.50 a month in income at age 66. These figures are excluding your State Pension entitlement and before tax.
£500,000 pension: what income could it provide?
Here we calculate the income you may receive from a £500,000 pension, depending on whether you choose a pension drawdown plan, or to buy an annuity:
Pension drawdown
If you take 25% from your pot as a tax-free cash lump sum, this leaves you with £375,000. If you then chose to move into pension drawdown, and withdraw 4% a year from your pot, this would produce an annual income of £15,000 a year or £1,250 a month before tax. Together with your full State Pension from age 66, at £11,500 a year in the 2024/25 tax year, this would produce an annual income of £26,500 (£2,208 a month). In this scenario, your income above your personal allowance threshold is £13,930, so after tax is deducted, you’d receive £23,714 (£1,976 a month).
If you didn’t take any tax-free cash from your pension pot, you could increase your pension to £20,000, or £1,666 a month, bringing your total income to £31,500 (£2,625 a month, including the State Pension). Your income after tax in this scenario would be £27,714 (£2,310 a month).
Annuity
You could exchange a £500,000 pension for an income of about £23,988 a year from an annuity at age 66, or £1,999 a month, according to Aviva’s online annuity calculator, assuming you’re in good health. That’s after taking a tax-free cash lump sum of £125,000 at age 66. If you receive the full State Pension, this produces a retirement income of £35,488 which, after tax is deducted, leaves you with an income of £30,904 a year.
Summary
You could receive £1,250 a month after taking your 25% tax-free cash lump sum from a drawdown plan, or £1,666 if you don’t take any tax-free cash from age 66 (assuming you withdraw 4% of your pot). Alternatively, you could buy an annuity that’ll provide £1,999 a month in income at age 66. These figures are excluding your State Pension entitlement and are before tax.
How much income do you need in retirement?
The amount you need personally for a comfortable retirement will, of course, depend on your particular circumstances and outgoings. The amount one person might easily be able to live off may not be nearly enough for someone else, who’s perhaps used to taking several holidays a year and other luxuries.
According to the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards research, to have a ‘moderate’ living standard in retirement, you’ll need an income of about £43,100 before tax if you’re a couple, or £31,300 if you’re single.
The annual income you need in retirement rises to £59,000 a year if you’re a couple wanting a ‘comfortable’ retirement, or £43,100 a year for someone who’s on their own. Or, to fund a basic or essential retirement, a couple would need a before tax income of £22,400 a year, falling to £14,400 a year for a single person.
Read more in our articles Can you afford to retire? and How much should I save for retirement?
Where to seek advice
It can be extremely difficult working out if you’ve saved enough to produce the retirement income you need, but a financial advisor can help you with this process.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased, or for more information check out our guide on How to find the right financial adviser for you.
Alternatively, if you’d like advice on your private pension, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors. With your free consultation, there’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Please note that Fidelius can discuss private pensions, but is not able to advise on the State Pension and defined benefit / final salary (e.g. NHS) pensions.
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