How much income could I get from a £100,000 pension pot?

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If  you either have or are thinking of saving into a pension plan you are probably wondering how much retirement income you can expect from your pension pot. So what’s the answer?

Will you want to take a tax free cash sum from your pension savings?

Ordinarily you are entitled to take a tax free cash lump sum, from your pension before taking an income. You can take up to 25% of the total fund value but obviously this will reduce the income you receive when buying an annuity (which is a guaranteed income stream in exchange for a capital lump sum). There is no hard and fast rule whether it’s more beneficial to take a cash sum or not, it depends on your individual circumstances. The cash sum is tax free whereas any annuity payments you receive will be taxed, but on the other hand this income will be payable for life.

With a pension pot of £100,000 a maximum tax free cash lump sum of £25,000 can be taken leaving £75,000 to buy an annuity.

What age do you want to retire?

The age at which you want to start receiving an income makes a massive difference to the amount of income you will receive.

  • A male aged 65 could currently receive an annual annuity income of £5,857 (gross) from a £100,000 purchase price. This income would increase to £6,805  if aged 70 and £8,175 if aged 75 at time of purchase. These examples are based on a single life, level income with no guarantee.

But for a more personal estimate of potential annuity income this annuity comparison tool is useful.

Do you currently have any health issues?

If you smoke, suffer from ill health or currently take any prescribed medication then you may be able to increase your retirement income by purchasing an enhanced or impaired life annuity. The level of annuity income will depend on your individual circumstances. Interestingly Hargreaves Lansdown has launched an enhanced annuity calculator which, although not covering every insurer, will give you an indication of the potential uplift in retirement income.

What type of income do you want from your annuity?

When purchasing an annuity there are a number of different options regarding conditions attached to the payments. For instance payments could be guaranteed for a number of years, increase over time or be payable to a spouse following  your demise.

The following examples give you an idea of how these conditions would affect your payments.

  • A person aged 65 could currently receive an annual annuity income of £3,516 from £100,000 purchase price, which would increase by the Retail Price Index and be guaranteed for 5 years. The annual income from this annuity is £2,341 less than a level annuity.

How do you want your annuity income paid?

How you want your income paid can affect, marginally, the income you receive. If you choose to receive your first payment immediately on purchase of your annuity then your income will be slightly lower than if your first payment was 6  or 12 months later.

What annuity provider you choose?

The amount of your annuity income will differ depending on the annuity provider you choose. Even amongst the top ‘best buy’ providers there can be a difference of hundreds of pounds each year in the amount of income they will provide. So shop around using the aforementioned annuity calculator.

Is there an alternative to buying an annuity on retirement?

Yes, you could leave your pension pot invested and still receive an income using what is known as income drawdown, this would provide an income now and leave the decision on purchasing an annuity until later. This could be a possible approach for someone  moving to part-time employment and who just needs a top-up income rather annuitising their entire pension pot.

There is a drawback, however, as your pension pot remains invested and therefore could go down in value. If your investment underperforms then you would  be left with a  much smaller pension pot for when you eventually want to purchase an annuity. For a number of reasons, primarily costs, income drawdown is not considered a viable option for those with pension investments under £100,000.

So how much income can you draw from income drawdown? Under what is known as capped drawdown there are a number of rules surrounding the level of income that can be drawn which include a maximum amount as well as regular reviews. The calculations of the maximum income are complex but here is a handy drawdown calculator which does the job for you. But to give you a guide a man of 65 can draw a maximum of £6,720 a year initially, subject to ongoing review.

But for some people there is now an option known as flexible drawdown. Under flexible drawdown you can withdraw as little or as much income from your pension fund, as you choose, as and when you need it. The main constraint is that you have to declare that you are already receiving a secure pension income of at least £20,000 a year and have finished saving into pensions.

Conclusion

Hopefully, the above has given an idea of the level of income a £100,000 pension pot can provide. However, you need to be aware that annuity rates are always changing, therefore the above figures should only be used as a guide. Also, I strongly recommend seeking the advice of an independent financial adviser.


About Liam

Over 30 years experience in financial services, residential lettings and property sales. Director of a leading national estate agency chain, until leaving in 2008 to pursue other commercial interests. Vast experience in new business development, business change, management development and business strategy.