Important information: the value of investments can go down as well as up so you may get back less than you invest
IF you’re nearing the so-called ‘critical zone’ - a period referred to as the 10 years before retirement, and the ten years after retirement, the question of ‘how much do I need in my pension to live comfortably’, is probably front of mind.
Of course, there is no ‘one-size-fits-all’ answer to this question. Your overall wealth, health and wellbeing will play a role, not to mention your ongoing financial responsibilities. You may have adult children or grandchildren you need to support, or a bit of the mortgage left to chip away.
The answer to ‘how much pension income is enough’, can also vary vastly depending on your own personal view of what ‘comfortable’ means.
But what if we worked our way backwards by answering the question: ‘How much retirement income might a £1m pension pot buy you?’ Or to be even more precise: a £1,073,100 pension pot. This figure is the pension lifetime allowance for most people in the UK in the current tax year (2021/22).
The lifetime allowance is the limit on how much you can build up in pension benefits over your lifetime, while still enjoying the full tax benefits. It applies to the total of all the pensions you have - defined benefit (final salary) pension schemes as well as savings in defined contribution pensions, but it excludes your state pension.
Now, let’s say you have managed to build up a pension pot of this size, how much income will you get from your £1m-plus pot?
If you choose to buy an annuity, an insurance product offering you an income for life, you can bargain on anywhere between £22,623 and £53,714 a year, depending on the type of annuity you buy, as the table* below shows:
Current annuity rate examples
|Single life annuity with no annual increases||£53,714|
|Single life annuity increasing in line with RPI inflation||£27,458|
|Joint life 50% annuity with no annual increases||£46,782|
|Joint life 50% annuity increasing with RPI||£22,623|
*Annuity rates as of 7/12/2021 based on a male, aged over 65 in good health. Joint life - based on female dependant aged over 62 in good health.
Thanks to pension freedoms, however, many people now choose to keep their pension invested and opt for pension drawdown. Pension drawdown gives you the flexibility to take whatever income you want – and change it when you need to. Your money stays invested so it has the potential to continue to grow and it can get passed onto your loved ones when you die. To work out what a sustainable drawdown strategy might look like, have a play on our pension drawdown calculator.
Another attraction of drawdown is that if you have money left in the pot when you pass away, this can be left to your nearest and dearest. If you pass away before age 75, they can access the money in your pot tax free subject to any available lifetime allowance where applicable. After age 75, they will pay tax in line with their marginal rate of income tax.
But to answer the question: ‘How much will £1mn buy you in pension income?’ You’re looking at a gross annual income of around £40,000 (4%) on average per year. Is that enough? Now, that’s a question only you can answer.
If you’re starting to think about your retirement, the Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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