What income can a £100k pension provide? | Drawdown vs Annuity

What income can a £100k pension provide?

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    According to the Office for National Statistics, the average pension pot value in the UK for those aged 55-64 is £107,300. But how much annual retirement income can you expect for that amount, and how long will it last?

    To determine what income a £100k pension can provide, factors like retirement age, desired income, investment returns, and life expectancy must be considered. It also depends on whether the pension income is taken via drawdown or an annuity. Careful planning and professional advice are crucial.

    This article will attempt to answer the question of how much retirement income you could take from a £100k pension using either a Flexi Access Drawdown or an annuity. We’ll use several retirement ages to show you how it can affect your pension income.

    Heritage Financial Planning has helped hundreds of happy clients plan for the retirement of their dreams. Please get in touch for personalised advice and support to reach your retirement goals.

    Income from a £100,000 pension using drawdown

    Flexi Access Drawdown allows individuals to leave their pension invested and draw down income as needed. It provides flexibility in choosing the amount and frequency of withdrawals, along with the ability to take a 25% tax-free lump sum. This means you could take a higher income during the active years of your retirement or before your state pension kicks in, then reduce it in later years. You can even take your tax-free lump sum and no income.

    Average pension pot by age in the UK

    Income tax is payable on funds withdrawn from a Flexi-Access Drawdown pension on any income drawn beyond the individual’s personal allowance. The flexibility of drawdown allows for varying withdrawal amounts, and understanding the tax implications is crucial for effective retirement planning.

    An example of a drawdown plan

    To determine how much annual pension income you can take, you must factor in what year the drawdown will extinguish, i.e. life expectancy. In this example, we will assume that:

    • Based on Theresa’s life expectancy, we will calculate regular drawdowns so the pension pot is extinguished at age 90 when she passes away.
    • The drawdown income that is taken each year increases by inflation so that it maintains its purchasing power. We will assume inflation at 3% a year. 
    • We will assume the investment returns are 4% per year for the remaining pension pot, net of all fees. 
    • We will base the following scenarios on Theresa retiring at age 55, 60 and 65. This is important, as her pension fund will have to support her for an extra ten years if she retires at 55 as opposed to 65. In other words, the pension fund has to work harder.
    • We will assume that Theresa is entitled to the full state pension of £10,600, and her state pension age is 66.
    • Finally, we will assume that no tax-free cash is taken, so the amount of income is based on all of the pension savings.

    Income from a £100,000 pot at age 65

    If Theresa is to retire at 65, this is a potential retirement term of 25 years. As this is the shortest of the three retirement terms we will look at, it allows for the largest amount of annual retirement income.    

    If Theresa takes a starting pension income of £4,539 that increases with inflation, the pot will be completely extinguished at age 90. When her state pension kicks in one year later at 66, her total income will be £15,139, without even accounting for a spouse or partner’s retirement income.

    By age 74, Theresa’s pension would still be worth over £84,000, which her beneficiaries could potentially inherit tax-free if she passed away early. 

    Retirement Living Standards Survey

    Looking at the Retirement Living Standards survey, which I regularly harp on about, £12,800 per year is required for a ‘minimum’ standard of living in retirement and £23,300 for a ‘moderate’ standard of living. If you have £100,000 in retirement savings, then you could argue a comfortable retirement is not too far out of reach, but this, of course, depends on your lifestyle and expenses.

    How hard is it to save a £100,000 pension pot?

    For younger savers, auto-enrolment should undoubtedly help things along, assuming the state pension remains the same, which is a big ‘if’.

    Let’s explore how you can save a £100,000 pension pot by making the following assumptions:

    • Zoe is 30 years old and has started saving for her pension. She had no other pension savings before this point.
    • Zoe’s salary is £30,000 per year, and her total pension contributions are £158.40 through auto-enrolment. We will assume she receives a pay rise equal to inflation each year.
    • We will look at Zoe’s potential pension pot if she retires at ages 55, 60 and 65.
    • The pension pot grows by 4% (net of all fees and inflation), so the eventual figure is in today’s money.
    • Zoe will receive the full state pension at age 66. It’s worth noting that to qualify for the full state pension, you need 35 qualifying years of National Insurance contributions. So, if you want to retire at 55, you must start contributing by age 20 to get the full state pension. For the sake of this example, we will assume Zoe has enough qualifying years and receives the full state pension at each different retirement age.

    If Zoe retires at 65, her estimated pension pot is £220,686. Even if the net growth rate of 4% is too high and is closer to 3%, the fund would still be worth over £185,000.

    Income from a £100,000 pot at age 60

    Age 60, that’s more like it, you might think! More time travelling and less time stuck in appraisals and one-to-ones. As the retirement term is five years longer, there is slightly more strain on Zoe’s pension pot, and so her retirement income is reduced.

    If we assume her life expectancy is 90, Zoe could take a starting income of £3,822 per year.

    estimated fund value vs income graph

    Her full state pension, which she receives a year later, could give Zoe a combined total income of £14,422 in today’s money. This is still above what the Retirement Living Standards suggest is needed for a ‘minimum’ standard of living in the UK for a single person.

    Income from a £100,000 pension pot at age 55

    Once again, assuming that Zoe’s life expectancy is 90, she retires at age 55, meaning she has a 35-year retirement term. You can see where this is going!

    These extra years put more strain on Zoe’s pension fund, so she may have to take less income than in the previous examples (unless she has the mettle to rely on her investment returns in later life).

    This could generate a starting pension income of £3,340 per year, which increases with inflation. Ten years later at state pension age, her income will be £13,940.

    Summary of the income from a £100,000 pension using income drawdown:

    Retirement AgePension PotStarting Income PA

    How flexi-access drawdown can go wrong?

    With drawdown, there is no guarantee that you won’t run out of money. Low returns, poor stock market growth or simply taking too much income can deplete your pension pots and there’s a real risk you could run out of money. See our blog on the 3 biggest drawdown mistakes.

    With that in mind, we will assume:

    • Net investment returns are lower at 2% per year
    • 7% of the pension pot is withdrawn initially, and this amount increases by inflation each year
    Pension savings running out at 74

    In this scenario, the pension savings would run out at age 74! This could leave you in financial hardship for your remaining years, which is difficult if you have become accustomed to the good life!   

    What annuity income could I get from a £100,000 pension pot?

    With a lifetime annuity, you essentially swap your pension fund in return for a guaranteed income that is paid for life. Once you die, the annuity usually dies with you. It is possible to add inflation protection and also a survivor’s pension so that the income maintains its purchasing power and can provide a pension for your loved ones. However, this usually reduces the starting retirement income. 

    As the income is guaranteed for life, there is no risk of the pot running out. So it’s a sensible option for those who are uncomfortable with investments and market volatility.

    Annuities fell out of favour after the pension freedoms were introduced in 2015 and because of the ultra-low interest environment that existed right up until 2021. You can see how the potential income from annuities has increased dramatically as interest rates have risen in recent years to combat inflation:

    Annuity rates chart based on figures for September 2023

    The amount of annuity you can achieve depends on:

    Your age. The older you are, the better the rate tends to be, as the insurance company statistically will have to pay you the income for a shorter period of time.

    Your health. If you have any health conditions, you may be entitled to an enhanced annuity, leading to a higher annuity rate. This varies between insurance companies. 

    Different types of annuities:

    The type of annuity you choose from the outset affects your income. Here are two examples.

    • Annuity 1 – Single Life annuity with inflation protection.  
    • Annuity 2 –  Joint annuity with a 50% survivor pension, increases with inflation and has a 5-year guarantee.

    As with the drawdown example, we will give examples of an annuity purchased at ages 55, 60 and 65 to show you how the age at which you retire can affect the starting income. Both examples assume the person is in good health. The figures will be based on the whole pension fund and assume no tax-free cash is taken for simplicity.

    How much annuity income from a £100,000 pension

    Age 55:

    Type of AnnuityIncome PAAnnuity Rate
    Annuity 1- Single Life Annuity£3,325.683.33%
    Annuity 2- Joint Life Annuity£3,092.163.09%

    Age 60:

    Type of AnnuityIncome PAAnnuity Rate
    Annuity 1- Single Life Annuity£3,833.643.83%
    Annuity 2- Joint Life Annuity£3,544.923.54%

    Age 65:

    Type of AnnuityIncome PAAnnuity Rate
    Annuity 1- Single Life Annuity£4,543.324.54%
    Annuity 2- Joint Life Annuity£3,092.163.09%

    You can see how an annuity’s extra ‘frills’ can reduce the initial amount of income.

    The age at which you retire significantly affects the level of annuity income that you may be able to get when you retire. If you retire at 55 compared to someone aged 65, your annuity income could be as much as 40% lower. 

    It is worth mentioning that annuity rates change all the time, as we saw in the graph earlier.

    How does taking a tax-free lump sum affect my pension income?

    You can usually take 25% of your uncrystallised pension pot tax-free. However, the lump sum will reduce your pension pot and, therefore, reduce the amount of income available to you in the future.

    If you are thinking of taking some of your tax-free cash, you should always bear this in mind.

    Start building your retirement income with Heritage Financial Planning

    If you have a defined contribution pension, there’s no right or wrong answer as to whether you should consider taking an income via pension drawdown or buying an annuity. It very much depends on your circumstances.

    Another option gaining popularity is to take an annuity out to cover your essential expenditure and then use drawdown and its flexibility to tailor it around your discrepancy expenditure.

    If you are considering retirement and your options, seeking professional guidance and speaking to an independent financial adviser is always a good idea.

    Contact Heritage Financial Planning and start taking control of your retirement plans today.

    The value of investments and any income from them can fall as well as rise, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance and should not be relied upon.

    Annuity rates may change in the future, which could reduce the potential income. The figures in this article are based on various assumptions, which are impossible to control, such as life expectancy, growth rates and inflation. If the figures are much worse, this can affect the sustainability of your pension fund.

    Picture of Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

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