With careful planning, especially when combined with y0ur state pension, it is possible to turn your pot into a reliable, steady retirement income
Saving a £100,000 pension pot is a significant achievement – yet it may not last for decades in retirement.
Although it’s close to the average pension UK average – £125,000 for men and £58,000 for women in their early sixties, according to ONS data – it’s not enough for a luxury lifestyle.
However, with careful planning, especially when combined with the state pension, it’s possible to turn your pot into a reliable and steady retirement income. The key is being strategic in your planning to make your money last longer.
We spoke to experts to reveal four simple ways you can retire with a £100,000 pension pot.
- Plan carefully how to spend your 25 per cent tax-free lump sum
Once you turn 55, you can take a 25 per cent tax-free lump sum from your pension without paying income tax – the minimum age is rising to 57 in 2028.
With a £100,000 pension, a £25,000 tax-free lump sum could be a great way to pay off your mortgage or boost your emergency savings.
But you need to tread carefully because once withdrawn, your money will lose its protection from capital gains and dividend taxes – you could end up with a larger tax bill later on.
With the stock market tumbling in recent weeks, it might be worth holding tight if you don’t need the money immediately. You can leave it invested to grow for longer, potentially giving you more to play with by the time you retire.
- Weigh up buying an annuity
Assuming you’ve already taken a 25 per cent tax-free lump sum from your £100,000 pension pot. What options do you have with the remaining £75,000?
One option is buying an annuity, where you give your pension pot to an insurance company in exchange for a regular, guaranteed income for life. You’ll have an income for as long as you live so you won’t have to worry about running out of money or a dip in the stock market affecting your pension income.
Tom Selby, director of public policy at investment platform AJ Bell, said: “If you buy an annuity, you shouldn’t need to worry about making your fund last the distance, as the insurer has taken on that risk and will pay you an income for the rest of your life.”
Helen Morrisey, head of retirement analysis at Hargreaves Lansdown, explains how much income you might get for £75,000.
“According to the latest data from HL’s annuity search engine a 65-year-old with a £75,000 pension can get up to £5,764 per year from a level single life annuity with a five-year guarantee.
“An annuity that increases 3 per cent per year will offer some protection against rising prices, but you will receive a lower starting income – roughly £4,289.”
While this might not seem like much, a level annuity, combined with the state pension – currently £11,973 if you get the full amount – adds up to a modest yet respectable retirement income of £17,737.
Ms Morrisey adds: “You need to search the market to make sure you get the best deal and type of annuity to meet your needs as once bought, it can’t be unwound.”
The state pension currently is protected by the triple lock, ensuring it increases by the highest of inflation, wage growth or 2.5 per cent. If it stays in place, it is likely you will have a higher state pension in future – and therefore a boosted income.
However, in the near future is expected to breach the income tax limit of £12,570, which means millions will pay tax on their state pension.
- Consider flexible drawdown
Another popular option is leaving your money invested and taking withdrawals as you need them – known as “flexible drawdown”.
Using drawdown offers maximum freedom and flexibility, but also comes with some risks as you’ll need to manage your money yourself – you could run out of money if you withdraw too much too quickly.
Mr Selby explains: “Your fund will remain invested with the potential to grow over the long term. However, you need to keep in mind that you will be responsible for ensuring your fund lasts as long as you do, which means you’ll need to review withdrawals to make sure you are on the right track.”
He adds: “There is no hard-and-fast rule about how much you can take sustainably through drawdown, although experts often say a healthy 65-year-old could take 3 to 4 per cent of the starting value of their fund each year, with income rising in line with inflation, and should expect their fund to last throughout retirement.”
Taking 4 per cent from a £75,000 pension pot would give you £3,000 pension income, but you might be able to take more depending on how your investments grow.
- Think about a mix of options
Thankfully there’s no rush to make a decision in retirement. You can even combine more than one option.
Rather than buying an annuity straight away, you could wait until you reach an older age, when annuities tend to offer a higher income.
Mr Selby said: “People often prefer to leave buying an annuity until later in life, while taking advantage of flexibility and the potential for investment growth while they are younger and more active.”
Ms Morrisey agrees that a combined approach can work well. “Perhaps you use an annuity to secure what you need for your essential expenses and use drawdown for anything else. You could also annuitise in slices throughout retirement if your desire to remain invested wanes.”
With careful planning, you can make a £100,000 pension pot last the distance throughout your retirement journey.
How to top up your pension pot
By Emily Braeger, Money Reporter
Utilise tax relief
Pension savings benefit from tax relief, meaning money you save into a pension is free of income tax on the way in.
Pensions can be an especially tax-efficient way of saving for higher rate taxpayers. For example, if you earn £65,000 a year and put £10,000 into a pension through salary sacrifice, the whole £10,000 would go in as a contribution.
But if you wanted to save that £10,000 elsewhere or spend it, 40 per cent income tax and 2 per cent national insurance would be charged first, leaving you with a tax bill of £4,200 and only £5,800 to spend.
Max out employer contributions
If you are employed, your first step should be to check the pension benefits your employer offers. All employers must provide a workplace pension scheme and contribute a minimum of 3 per cent of your salary by law.
But some employers will be more generous than this. Some may pay in a percentage that is well into double figures, or will offer to “double match” your contributions up to a certain amount.
For example, they may pay in 16 per cent if you contribute 8 per cent.
Check national insurance contributions
To get the full state pension of £221.20 a week, you need at least 35 qualifying years of national insurance contributions. You will need at least 10 years of contributions to get any state pension.
Check your national insurance record through your personal tax account on the gov.uk website to see if you are on track.
You can top up gaps in your national insurance record for the previous six years. Some can buy back missing national insurance years dating from 2006. This may be worth doing to help you get the full state pension.