What income can I get from my pension pot? | £100K, £500K...

What income can I get from my pension pot?

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    Planning for retirement involves crucial decisions regarding how to use your pension pot to sustain a comfortable lifestyle. As you approach this pivotal stage, understanding the available options is paramount.

    There are two main ways you can take an income from your private pension. An annuity provides a guaranteed lifetime income in exchange for your total pension pot. Flexi Access Drawdown allows for investment growth potential and adjustment of income levels as your needs evolve through retirement.

    In this article, we are going to explore how much income your pension can provide and touch on the advantages and disadvantages of each option. We will use notional fund values of £100,000, £250,000 and £500,000 so you can relate it to your own circumstances.

    Before you make a decision about how to take your pension pot, contact the experts at Heritage Financial Planning.

    What is Flexi Access Drawdown?

    With income drawdown, you have full control of how much you can take from your pension pot and the timing of any withdrawals.

    You can take as much or as little income as you like and have the ability to change the amount of income once you start to take an income.

    The remaining fund that is not taken as income is invested and so has the potential for investment growth, which can help support the longevity and sustainability of the pension fund. However, this can be a double-edged sword if investment returns are poor or worse than expected.

    It is very common for those who retire before the state pension age to take more drawdown income from their retirement savings before reducing this once they receive their state pensions. 

    Although this flexibility is great, it comes at a cost. If you take too much income or investment returns are poor, there is a real chance that you could run out of money.

    With people living longer than ever, this can also strain your pension as it may have to support a retirement well in excess of thirty years. 

    Data from the Financial Conduct Authority in 2021 states that the average retiree in pension drawdown now is taking a retirement income of around 8% from their pensions. It doesn’t take a mathematician to work out at these levels, this is not sustainable and depleting your pension pots is a real risk.

    It is usually possible to take up to 25% of your pension as a tax-free cash sum. This can be as a single cash lump sum or a series of tax-free lump sums. You will pay income tax on the remaining amount at your marginal rate.

    What is an Annuity?

    In this article, we will focus on lifetime annuities. With an annuity, you essentially swap your pension fund in return for a guaranteed income that is paid for the rest of your life. It is possible to add inflation protection so that the income maintains its purchasing power.

    You are able to take your tax-free cash as a lump sum before purchasing the annuity with the remaining pension pot, or you can even use the whole pension pot. You will have to pay tax on the income.

    With a single life annuity, the pension income will die with you. It is possible to add a survivor’s pension, which can be a percentage of the income at the date of your death, such as 50%.

    So if John died and the annuity annual income was £50,000 at the date of his death, his wife would get a reduced annuity payment of £25,000. Once she died, the annuity would then stop.

    Annuities became very unpopular after the invention of drawdown and also the ultra-low interest rate period we found ourselves in, as the amount of income you can get is intrinsically linked to gilt yields and interest rates.

    The amount of annuity income you get depends on many factors, such as your health, age, health and the value of your pension pot.

    You can see how the income available from annuities has increased dramatically in recent years, and so have their popularity.  

    Annuity rates chart


    Before we look at the figures, let’s establish some assumptions:

    • This is for a male who has retired at age 63 and is in good health. He will receive a full state pension at age 66.
    • According to the Office of National Statistics, the life expectancy for a 63-year-old is age 85, so we will set it so their drawdown pension pot is extinguished at this age.
    • We will assume they are invested in a ‘balanced portfolio that returns 6% per year. We will deduct 0.75% for investment and platform fees which leaves a net return of 5.25%.
    • Finally, we will assume the income increases each year by inflation so that it maintains its purchasing power. We will assume inflation is 3% a year.

    What will a £100k pension pot provide me?

    Flexi Access Drawdown

    With a £100,000 pension, you would be able to take an annual income from the outset of £5,751, which increases with inflation.

    Remember, we have set it so the pension fund would run out at age 85. By age 75, the remaining pension fund would be worth just under £70,000.

    estimated fund value vs income graph flexi access drawdown

    Don’t forget to factor in your state pension that would be payable at your state pension age, which is currently age 66.

    If we assume you receive the full state pension, this would provide an income of £10,600 per year. This would translate to a combined income in today’s money of £16,351:

    State Pension£10,600

    What’s interesting is that you are able to save a relatively modest amount. This is more than what the RLSA suggest you would need for a minimum standard of living in retirement(for a single person).

    minimum standard living in retirement (PLSA)

    What about an annuity?

    If you opted for a single life annuity that increases with inflation, this would provide a regular income of £4,442. This represents an annuity rate of 4.44%. If you wanted to protect against your pension dying with you and not providing your loved one with an income, you could add a 50% survivor pension with a 5-year guarantee.

    However, this would come at a cost, and this would reduce the income to £3,780. This would be a lower effective annuity rate of 3.78%.

    IncomeSingle Life AnnuityJoint Life Annuity
    Annuity Single Life£4,442£0
    Annuity Joint Life£0£3,780
    State Pension£10,600£10,600

    If you died at 74 and you had selected a single life annuity, that’s it, the annuity would die with you. However, if you remember with income drawdown, if you died prematurely at age 74, your loved ones could inherit the remaining pension pot of £70,000 – which they could take as a tax-free lump sum or income.

    What will a £250k pension pot provide me?

    If you opted for a drawdown, you would be able to take an initial income of £14,500 that would increase with inflation before the pension pot ran out at age 85.

    By age 75, your pension fund would be worth just under £175,000.

    If you went with an annuity, a single life annuity could provide you with an annual income of £11,382. If you again opted for the joint life annuity, this would reduce the annual income down to £9,500.

    Your retirement income at age 66 for each option would be:

    IncomeDrawdownSingle Life AnnuityJoint Life Annuity
    Annuity Single Life£0£11,382£0
    Annuity Joint Life£0£0£9,500
    State Pension£10,600£10,600£10,600

    What will a £500k pension pot provide me?

    With drawdown, you could take an initial income of £29,177, and the pot would be extinguished by age 85. If you were to pass away at age 74, your beneficiaries could inherit the remaining pot worth £372,000, completely tax-free, which is one of the biggest advantages of a drawdown compared to an annuity.

    what will 500k pension pot give me

    If you opted for an annuity, you could buy a single life annuity that would provide an index-linked annuity income of £22,668. If you opted for a joint life annuity, this would provide a reduced income of £19,057.

    At age 66, your retirement income would be:

    IncomeDrawdownSingle Life AnnuityJoint Life Annuity
    Annuity Single Life£0£22,668£0
    Annuity Joint Life£0£0£19,057
    State Pension£10,600£10,600£10,600

    What’s clear is that with either option, if you have a £500,000 pension or more, this would give you an extremely comfortable retirement, allowing you to take those world cruises or whatever else floats your boat!

    A word of warning on income drawdown…

    Although it can seem tempting to disregard an annuity in favour of a drawdown, for what appears to be the higher amount of income, flexibility and greater death benefits, income drawdown is not without its risks.

    If you take too much income from your pension, investment returns are worse than expected/in the past, or you simply live longer, this can put a strain on your pension pot, and you run the real risk of running out of money in retirement.

    With an annuity and guaranteed income, you don’t have this risk. You are guaranteed to receive an annual income for the rest of your life.

    To illustrate how drawdown can go wrong, let’s use the example of a £100,000 pension again. However, in this example, let’s assume 8% of the pension is withdrawn each year in line with the FCA’s warnings earlier, so £8,000 initially. We will also assume investment returns are lower at 3% per year.

    The pension would run out at age 76, which is before life expectancy, meaning you would face a very uncertain future at the end of your years – which is not a very reassuring prospect!

    How pension drawdown can go wrong

    If I take my tax-free lump sum, do I have to take an income?

    Not necessarily. With drawdown, you can take some or all of your tax-free cash and delay taking an income.

    This is not possible with an annuity, though. Once you take your lump sum, you would have to buy an annuity with the remaining pension fund.

    You don’t have to take the maximum amount of tax-free cash in one go with a drawdown. It is possible to take this in a series of tax-free cash lump sums.

    Will you always get a guaranteed income from a pension pot?

    No. With defined contribution pensions, you usually have all options available to you.

    However, your pension provider may not facilitate all options, such as Flexi Access Drawdown. In such cases, you would have to transfer to a provider that allows this. Before doing this, you should check that you will not lose any guarantees or incur any charges by doing so.

    Contact us for advice on pension income

    Heritage Financial Planning is here to answer all of your questions about how to take your pension.

    Take a look at our retirement planning services and contact us to arrange a consultation with one of our experienced financial advisers.

    HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate tax planning

    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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