If you either have or are thinking of saving into a pension plan you are probably wondering 'how do I calculate my pension' and how much retirement income you can expect from your pension pot. So what's the answer?
Under the pension rules that came into effect in April 2015 you can now take 25% of your pension as a tax-free lump sum and as much of the remaining pot as you like as lump sums, but these are taxed as income. In fact, you can treat your pension a bit like a bank account, withdrawing as you go, but where 25% of it is tax-free while the remainder is taxed at your marginal income tax rate. But one thing I must point out is that when the new pension freedoms came into effect, pension schemes were not compelled to provide access to them. I cover this in more detail at the end of this article. If your existing personal pension provider does not allow you to access your pension, as per the new pension rules, you can transfer your pension to a new pension provider who will allow you to access it. I look at the best Self Invested Personal Pensions (SIPPs) and personal pension providers to transfer to later in this article.
If you are wondering whether to transfer a final salary pension so that you can take advantage of the pension freedom rules and cash in your final salary pension then read my article 'Should I transfer my final salary pension?'
Always bear in mind that cashing in a pension is not tax-efficient and you may also then need to generate an income from a smaller pot of money as a result of taxation. So let's assume that you wish to use your pension pot in order to produce an income.
How to calculate the pension income you could get
Our easy to use pension pot calculator will instantly tell you how much income you can expect from your personal pension pot. It can tell you whether you are on track for the retirement you want as well as what the impact will be of increasing your monthly pension contributions. Once you have used the calculator be sure to read the next section of this article on things to consider.
Don't forget you should also be entitled to a state pension so long as you have reached state pension age (currently 66). The amount you receive will depend on your national insurance contribution record, and you could be eligible for up to £221.20 per week. That equates to £11,502.40 per year.
Is your pension on track?
Our free pension calculator allows you to enter a few details and instantly tells you how much income you can expect from your pension pot. It also tells you whether you are on track for the retirement you want and what the impact will be of increasing your monthly pension contributions.
Start the pension calculatorThings to consider…
Once you know how much your income from your personal pensions will be, there are a few other things to consider…
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 pension value but obviously, this will reduce the income you receive should you buy an annuity (a guaranteed income stream in exchange for a capital lump sum) or when taking an income via what is known as income drawdown. 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 income payments you receive will be taxed.
With a pension pot of £100,000 a maximum tax-free cash lump sum of £25,000 can be taken leaving £75,000 to produce an income.
What type of income do you want from your pension pot?
You can find out details about your pension pot options in the most up-to-date pension rules guide. Ultimately if you want to use your pension pot to generate an income you can use income drawdown (see later), purchase an annuity or a combination of both. If you are unsure what to do then seek the help of a qualified financial adviser. If you don't already have a financial adviser you can trust then we can help you with our 10 tips on how to find a good financial adviser.
One advantage of income drawdown is that it gives you greater flexibility over your retirement income and also allows you to keep your pension pot invested so that it can grow, along with your income (although neither is guaranteed). I cover drawdown in more detail later. While annuities are less attractive than they were, some people still prefer the security of a guaranteed income stream.
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. For more information on annuities, check out our articles What is an annuity and how does it work? and What is an annuity pension?
The following examples give you an idea of how certain conditions would affect your payments.
- A person aged 65 could currently receive an annual annuity income of £4,792 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 around £2,700 less than a level annuity.
What age can you 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 around £7,449 (gross) from a £100,000 purchase price. This income would increase to around £8,191 if aged 70 at the time of purchase. These examples are based on a single life, level income with a 5 year guarantee.
For a more accurate estimate of potential annuity it is best to use an annuity comparison tool to gain a personal evaluation.
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. Hargreaves Lansdown has launched a great enhanced annuity calculator which, although not covering every insurer, will give you an indication of the potential uplift in retirement income.
See if you can get an enhanced annuity rate
Find out if you can get a better annuity rate based on your health and lifestyle using this purpose built comparison tool.
Run a quote nowIf you want an annuity then how do you want your 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 should 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.
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 than 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 when/if you eventually want to purchase an annuity or draw further lump sums from your pension pot.
So how much income can you draw from income drawdown? To give you some history, there were previously a number of rules surrounding the level of income that could be drawn under what was known as ‘capped drawdown'. The calculations were complex and they included a maximum amount that could be drawn as well as regular reviews by the Government Actuarial Department (GAD). It was superseded by flexible drawdown (often referred to as flexi-access drawdown) in April 2015 and means you can now withdraw as little or as much income from your pension fund as you choose, as and when you need it.
Check out our article What is pension drawdown and how does it work?
Best Pension & SIPP
Whether you are planning to save for retirement or want to cash in your pension there are a number things to consider before making your product choice. Think of a personal pension like a car. What makes the car go is what's under the bonnet and the fuel you put in it – not the bodywork. So a pension product pulls everything together into a neat package. The array of pensions may seem pretty mind-boggling but the good news is that they are now much cheaper and more flexible than ever.
A SIPP (a self invested personal pension) used to be only suitable for those with large pension pots but this is no longer the case as competition has driven down SIPP charges. I suggest that you download this excellent and easy to understand SIPP guide which tells you everything you need to know about SIPPs including:
- who are SIPPs best suited for
- how to get the best from a SIPP
- how much you can and should be contributing to your pension
- your investment options
- your options at retirement
Of course, costs are one of the most important factors when choosing a SIPP. Therefore I have produced a roundup of The best & cheapest SIPPs.
The best SIPP for you
Our comparison of the SIPPs available across the market makes it easy for you to find the best and cheapest SIPP for you.
Compare SIPPs