What income might I get from a £500,000 pension?

The numbers thrown around by pensions experts are often huge. The industry is worth trillions of pounds, and research tells us we need to build six-figure pots to be comfortable in retirement. Most of us don’t deal in those kinds of multiples, however. We’re far more familiar with annual salaries and monthly outgoings.

It is useful, therefore, to know the regular income different sizes of pension will yield. In April, we explored what you might get from a £250,000 pot. Now, we’ll lay out in simple terms what a £500,000 pension could mean for you.

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Income options

Since George Osborne introduced ‘pension freedoms’ in 2015, people have had more control over how they use their retirement funds. We’re talking here about money saved and invested inside a ‘defined contribution’ pension scheme. That could include workplace schemes or a self-invested personal pension (SIPP).

Many pensioners still choose to buy an annuity - a financial product that guarantees income for life in exchange for a chunk of savings. Once the default option, annuities have made a comeback in recent years because higher interest rates have boosted the returns up for grabs.
 
However, they will never be particularly flexible: buying an annuity involves handing your cash to an insurance company, and when you die payments will usually stop. It is possible to add a ‘guarantee period’ to ensure payments continue after death, but this comes at a price.

As a result, a growing number of people are opting for ‘pension drawdown’ instead. This is when you keep your savings invested and simply take regular income from the pot.
 
Whichever route you choose, you are usually allowed to withdraw 25% of your pension tax-free (up to a limit - currently £268,275), with income tax applying to the rest. And remember: you don’t have to pick just one method of accessing your pension cash. These options can be blended and changed over time. An adviser can help with that.
 

How much to expect from an annuity

If you have a total pension pot of £500,000, you could take £125,000 (25%) tax free. This would leave £375,000 to buy an annuity with.
 
Annuity rates depend on a range of factors. Age and health play a big part: a 75-year-old with high blood pressure would typically get a better deal than a 65-year-old with no medical conditions. The economic backdrop is also key, given annuity rates are linked to bond yields.

At current rates, a £375,000 annuity could generate an income of £29,257 a year - or £2,438 a month - with a five-year guarantee. This assumes you are a healthy 65-year-old, and your income would not increase over time.
 

How much to expect from drawdown

Knowing how much to drawdown from your pension every year can be tricky. Thankfully, a lot of the work has been done already, using thousands of possible market scenarios. It has resulted in the ‘4% rule’ - the theory that 4% annual withdrawals, updated each year with inflation, should mean your pension lasts for at least three decades.

• Read: The 4% rule: the basics

For a £500,000 pension pot, with £125,000 taken tax-free, this would mean annual income of £15,000. This sounds low compared with the annuity income, but it would increase in line with inflation - unlike in the example above. Importantly, the money in drawdown also remains in your possession and is available to use as you wish, including as inheritance to pass on after you die.

The 4% rule is very cautious. According to the Fidelity Pension Drawdown Calculator, such a withdrawal rate would eke out your pot for well over 30 years in normal market conditions. 
If you raised your withdrawal rate to 5%, your annual income would increase to £18,750. According to the same calculator, this would last you 30 years in normal market conditions. However, if your investments performed poorly, your pot could run out by the time you are 86.

*Based on single-life annuity rates from HUB Financial Solutions on 18.6.25. Healthy 65-year-old, level income, five-year guarantee.

Of course, in the case of both annuities and drawdown, you can boost your income levels further by also putting your tax-free cash to work.

How much do you need to be comfortable?

New research suggests single pensioners need £43,900 of yearly spending money to feel ‘comfortable’. This equates to pre-tax income of £52,220, including the full state pension. 
Retirement is cheaper if you live with someone else, according to the Pensions and Lifetime Savings Association. In this scenario, a ‘comfortable’ life costs £30,300 a year each, which equates to pre-tax income of £34,733.

• Read more: How much to save? What it takes for a 'comfortable' retirement

These are all big numbers, however, which feel out of reach for many. There are various tools to help you maximise your savings, however. 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.co.uk or over the telephone on 0800 138 3944.

Our retirement specialists also provide free guidance to help you with your decisions. They can provide advice and help you select products too, though this will have a charge.

Finally, it can help with planning to bring your retirement savings together in one place. If your pension money is split across several different workplace pensions from previous periods of employment, it can make sense to bring them together inside a SIPP.

• Read more on transferring a pension to Fidelity

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP and tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). It's important to understand that pension transfers are a complex area and may not be suitable for everyone. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.