Private pension savings will give your income a boost in retirement beyond the State Pension. But how far will your savings go? In this article we look at what different pension pot values could mean in retirement.
How to take retirement income
If you have a defined contribution pension, you can withdraw your savings through drawdown – meaning you gradually take out money over time. Another option’s to buy an annuity, but for this article we’ll concentrate on drawdown.
The typical advice is not to withdraw more than 4% a year. This will help you avoid running out of money and facing a pension shortfall if you live for longer than expected. You can access private or workplace pension savings from age 55 (rising to 57 from 2028), although some wait until the official State Pension age of 66 or later to dip into their pension savings.
The first 25% of your pension can be withdrawn tax-free. You can either take the 25% tax-free cash as a lump sum at the beginning or in portions. There may be income tax to pay on annual income beyond the personal allowance (currently £12,570 for 2023/24).
With this in mind, let’s look at what that 4% withdrawal figure means in reality.
Income from a £100,000 pension pot
In simple terms, a £100,000 defined contribution pension could give you a starting income of £4,000 a year or £333 a month if you withdraw 4%. That’s assuming you don’t take the 25% tax-free cash upfront. If you decide to take the tax-free cash at the start, you’d be left with a pot worth £75,000. This would give you an income of £3,000 a year or £250 a month.
If your money’s still invested in the stock market, the value of your pot will change on a daily basis. To keep things simple, you could withdraw a sum at the start of each year and pay yourself a set amount monthly. Ideally the amount would increase annually with inflation. To see how inflation will impact your retirement savings use PensionBee’s inflation calculator.
You’d aim to achieve annual returns above 4% to reduce the risk of running out of money, and bear in mind fees charged by your provider. If you qualify for the full State Pension, this’ll give you a further £10,600.20 a year, or £883.35 a month (in 2023/24). Combined with private pension savings of £100,000, it could take your total pre-tax income from pensions to £1,216 a month.
Income from a £200,000 pension pot
Total pension savings of £200,000 could give you an income of £8,000 a year or £667 a month if you withdraw 4% a year and don’t take the tax-free cash at the start. On top of the full State Pension, you’d therefore have a pre-tax monthly income of around £1,550.
Income from a £300,000 pension pot
A £300,000 pension pot would mean you have a starting annual income of £12,000, or £1,000 a month. Combined with the full State Pension, your total monthly pre-tax income would be around £1,883.
Below’s a table showing the income you could receive based on different sized pots.
|Total private pension savings||Monthly income in retirement||Monthly income with full State Pension|
How to build a £100,000, £200,000, £300,000 pension pot
When paying money into a pension most savers will benefit from tax relief, reducing the cost to you. PensionBee’s pension tax relief calculator shows how much you could gain. If you’re employed, and meet certain criteria, your employer will also make contributions that’ll boost the value of your pot. So achieving a six-figure pension pot’s less daunting than you might think.
Assuming you have no pension savings and aim to retire at age 66, the below table shows how much should go into your pension each month to achieve total savings of £100,000, £200,000 and £300,000 by age 66. It assumes investment growth of 5% a year, inflation at 2.5% and management fees of 0.70% a year. The figures have been calculated using PensionBee’s pension calculator, and are inclusive of tax relief and potential employer contributions.
|Monthly payments to achieve £100K pension pot||Monthly payments to achieve £200K pension pot||Monthly payments to achieve £300K pension pot|
Listen to episode 11 of The Pension Confident Podcast as our guests discuss what a happy retirement looks like and how you can get there. Listen on all major podcast platforms, watch on YouTube, or read the transcript.
Private pension savings will boost your retirement income beyond the State Pension.
Tax relief and employer contributions will help your pot grow quicker, reducing the cost to you.
The sooner you start saving, the longer your money will have to grow thanks to compound interest – putting you on track for a more comfortable retirement.
Elizabeth Anderson is a Personal Finance Journalist and Editor (Times Money, Telegraph, Metro and i paper).
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.