How much retirement income might £500,000 buy?

Many retirees opt to buy an annuity to get a guaranteed retirement income. Rising interest rates mean the amount of retirement income you can get from an annuity is looking more attractive than it has for many years.

Figures show someone with £500,000 in pension savings who buys an annuity at age 66 could currently expect annual retirement income of nearly £31,500 a year¹. This is less than the £43,100 net annual income which the Pensions and Lifetime Savings Association says is required to fund a ‘comfortable’ retirement for the average single person².

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Thanks to the pension freedoms that came into effect in April 2015, you have a lot more choice about what you can do with your pension pot. You no longer have to buy an annuity and income drawdown is available to everyone. But all this choice means that making the right decision has become a great deal harder.

More choice, but more thought needed

Retirees today have far greater flexibility when it comes to accessing the money in their pension pot. However, with this flexibility comes the possibility of making the wrong decisions. Under income drawdown, there is a risk that drawing too much income each year could see you using up all of your pension fund within your lifetime, leaving you short of the income you need.

Some people may shun annuities because they want to pass on their pension pot on death. But if they live longer than expected, there may be nothing to pass on and they may even run out of money.

So, if you have a £500,000 pension pot, what could you consider doing with it? First of all, you need to think about more than just your pension savings. A financial adviser will look at your broader personal and financial circumstances to ensure your retirement income strategy meets your needs and that all the risks are fully considered.

Best to consider all your finances

It is wise to consider all your assets and savings, not just your pension, when planning your retirement income. For example, someone who has other investments available to them could find that the tax applying to their pension fund on death could be lower than the inheritance tax on other assets in their estate. They may well be best served by accessing other funds for income in retirement and preserving their pension pot.

Meanwhile, if your pension is your main income source for the rest of your life, income drawdown on its own might not be the best choice because the risk of exhausting your fund could be too high. Although annuities have fallen in popularity, buying an annuity with at least part of your fund could still be a good way forward.

If we assume for the sake of income drawdown that the £500,000 pension fund grows at 5% a year after charges and that the income increases annually with inflation, then that fund could provide annual income of around £31,000 from age 66 until age 87. For those with more modest needs, the fund could provide a £25,000 annual income until age 95.

Trust the experts

The sensible route is to speak to an adviser and take a complete approach to all your assets. Income drawdown might be the right approach for some people, whereas others could be better off spending other assets and leaving their pension alone. Buying an annuity with part of your pot is another potential solution to consider.

Taking some financial advice can help you make an informed decision about how to access your money in retirement. By taking a holistic look at your finances, an adviser can find the best way of achieving your retirement aspirations. Here’s an idea. A future with financial peace of mind. Make it a reality with our support.

Find out more from our dedicated customer support team based in Edinburgh by calling us on 0333 207 9003, or by sending an email to customer.services@brewin.co.uk. Opening hours: Monday – Friday 8 am to 6 pm, and Saturdays 8 am to 12 pm.

¹ Annuity assumptions: single life, monthly in advance, no guarantee period, non-smoker, standard (healthy) rates, 2% indexation, payable for life. Quotes obtained from Iress on 25 October 2024.
² http://www.retirementlivingstandards.org.uk/

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.