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Is my pension pot big enough to retire on?
Monday 26th April, 2021
One of the main questions I am asked at barbeques and parties is, “How much do I need to retire?”. It’s a really valid question, when you consider that you could spend 30 – 40 years in retirement and it is therefore important that you have enough money to enjoy it.
The first thing to be aware of, is that everybody’s retirement needs are going to be different. Some people want to live a champagne and caviar retirement and others want enough to potter in the garden and take the grand-children out on a regular basis.
The figures below give a rough idea of the income achievable with a pension pot of £500,000 using either an annuity or pension drawdown.
First let’s look at purchasing an annuity. Sarah is 65 and in good health. She could expect the following from a pension pot of £500,000:
- Firstly, she could withdraw a £125,000 tax-free lump sum (25% x £500,000), leaving £375,000 to buy an annuity.
- Assuming no spousal benefits or indexation of income, this would provide approximately £17,981 per year. The income will stay the same for the rest of her life and inflation will have a substantial impact over that time.
With drawdown, the consensus seems to be that 3% of the pension pot is a sustainable amount to drawdown each year, which would allow for the following:
- If tax-free cash is taken; the remaining £375,000 would generate approximately £11,250 per year (£375,000 x 3%).
- However, upon death, the residual pension and any growth could be passed tax efficiently to beneficiaries.
- In addition, the drawdown amounts can be varied depending on expected expenditure for the year.
- Furthermore, growth in the pension over time is also a possibility, resulting in an increasing income.
- There are other options available, such as withdrawing the whole pension at once, but the income tax and Inheritance Tax implications of doing this, generally make this unattractive.
It is also important to remember that any health conditions may result in better annuity rates. Furthermore, the state pension is currently approximately £9,339 per annum for anyone with a full National Insurance contribution record. This is a nice supplement to any pension provisions.
The fact remains that pensions are a very useful vehicle for retirement or creating a legacy for children. The information above is just a broad sketch of the options available, as well as possible retirement options and income expectations. Sometimes there is even an argument for using the two options together to provide the correct solution.
The most important thing is that you take either guidance or advice in order to ensure:
- The solution you choose is the most suitable
- You receive the maximum income from any annuity
- Your investment portfolios are suitable and income expectations are reasonable
- You use the most tax efficient options to withdraw your income in order to make the most of your withdrawals and minimise their impact on your overall pension funds
- Your pensions are properly set up to make sure that your loved ones are looked after upon your death