The average size of a UK pension is £50,0001. How does this compare with your pot? Many people have pots much smaller than this: of the more than 825,000 pensions cashed in since April 2015, 88% were worth under £30,0002. But are these people making a big mistake? While you can’t live off a £30,000 pension pot on its own, smaller pension pots can make a serious difference to your standard of living and stress levels in retirement. So, we’ve looked at how much monthly income you could receive using pension drawdown, depending on the size of your pot, and what sort of difference that income could make to your life. Scroll on to reveal the purchasing power of a £30,000, £50,000, £70,000 and £100,000 pension pot.
Setting the pension scene
If you have a personal pension then, when it comes to taking an income from it, two of your main options are:
Buy an annuity: this means you sell your pension to an insurer in exchange for a guaranteed monthly or annual income for life.
Or you could opt for pension drawdown: as a result, you can take money from your pot as and when you choose. And in an emergency, you have a pot of cash you can access if you have to. This route means potentially higher returns, although it comes with higher risks and your income is not guaranteed.
The illustrations we are about to show you are based on going into pension drawdown at 65 and taking a monthly income so that the pot is empty at 85. We’ve assumed that the savings will grow, on average, 4.5% per year, after fees and charges. This is towards the upper end of what the industry would consider a normal, average growth rate over this period. And, of course, you may live much longer than 85.
For comparison, we’ve also shown what monthly income you might get from a single life annuity3.
Finally, the cost of everyday household bills we’ve listed are based on national averages. You might pay more than this…or you could be paying a lot less!
The purchasing power of a £30,000 pension
This size pension could give you a drawdown income of £189 per month. This could cover: A single-life annuity for a £30,000 pension could give you a guaranteed monthly income of £132.403.
The purchasing power of a £50,000 pension
This size pension could give you a drawdown income of £315 per month. This could cover: A single-life annuity for a £50,000 pension could give you a guaranteed monthly income of £221.093.
The purchasing power of a £70,000 pension
This size pension could give you a drawdown income of £441 per month. This could cover: A single-life annuity for a £70,000 pension could give you a guaranteed monthly income of £312.063.
The purchasing power of a £100,000 pension
This size pension could give you a drawdown income of £630 per month. This could cover: A single-life annuity for a £100,000 pension could give you a guaranteed monthly income of £446.813.
What else do you need to consider?
Before we look at what other income you might be receiving when you retire, it’s worth another quick word about drawdown and annuities.
Drawdown is the most flexible way you can take money from your pension. It gives you complete freedom and control when it comes to accessing your savings. Although, there are risks attached including running out of money too early if you don’t manage withdrawals. Drawdown isn’t suitable for everyone and it depends on your individual circumstances. That’s why it makes sense to seek financial advice.
Some people prefer the guarantees an annuity offers. And if your health is not so great, you could get a higher annuity rate. For people in this position with lower value pension pots, annuities can be an attractive proposition. On the flip side, buying an annuity means you no longer own your pension, which can severely limit if and how you pass on any of these savings as a legacy.
What other income could you be getting in retirement?
A personal pension probably won’t be the only source of money you receive in retirement. Here’s a quick list of other income you could receive:
- The state pension: Depending on how many years’ National Insurance contributions you’ve made, you’ll receive a monthly income from the government. Find out how much you might get here.
- Final salary pension: If you’re in the great position of having a final salary scheme through your work, then you should receive an additional guaranteed income for life.
- The ‘other’ pile: You might decide to carry on working on an ad-hoc, as-and-when basis. You might also have other savings pots or even regular income through property rentals.
2FCA Retirement Outcomes Review: June 2018.
3Based on exchanging a pension pot of the value stated for a single life annuity with no escalation.
4Based on the average annual cost for a band D property in the UK in 2018…read more
5Based on a June 2018 Money Advice Service report…read more
6Based on a July 2018 Money Advice Service report…read more
7Based on 2017 Office of National Statistics figures…read more