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What Annuity Can I Buy With My Pension Pot?

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How much annuity you can buy with your pension pot depends mostly on the size of your defined contribution savings.

You’ll also have to consider your age, state of health, location and whether or not you smoke, all of which will have an impact on how much you’ll receive in annuity income.

Your best annuity rate will depend on the options you pick, as well as the factors mentioned above you have little control over. It’s important to understand annuity rates as they determine how much money you’ll receive from your retirement savings.

Annuity or Pension Drawdown?

Of course, an annuity isn’t the only option. For some people, pension drawdown could provide a better retirement income than an annuity.

What is an Annuity?

What is Pension Drawdown?

  • A radically different way of accessing your pension when compared to an annuity. Rather than swapping your pension pot for a regular annuity, you keep it and take cash withdrawals and income payments as required.
  • The risk with pension drawdown is that your pension might run out too early and its performance is tied to the stock market and other underlying investments.
  • However, it may provide you with a higher retirement income than an annuity thanks to the current low annuity rates.

Whether or not drawdown is right for you depends on the size of your pension pot, your life expectancy and when you plan to retire, so it’s worth comparing annuities with pension drawdown to see which works best for you.

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What Income Will I Get with a £100k Pension Pot?

Someone with a £100,000 pension pot could expect an annuity income of £5,050.32 per year according to our Annuity Rates Calculator.

This is based on a single, non-smoking individual at age 65 who’s in good health and lives in the same postcode as our Brighton-based financial advisers. We’ve also assumed they haven’t taken the 25% tax-free cash lump sum they’re typically entitled to take upfront from their pension pot.

The pension drawdown figures are for comparison. These are pulled from our Income Drawdown Calculator, which is designed to give you an idea of how long your pension might last if you take a certain income from it.

Income From £100,000 Pension Pot

Non-indexed annuity

£5,050.32 per year

Male life expectancy at age 65 is roughly 84 years old

Age drawdown pot would run out if replicating an annuity

90 years old*

* Assuming constant growth of 4% and inflation at 2%. Calculations correct as of August 2nd, 2019

It is important to recognise the additional investment risk which comes with taking your retirement income via pension drawdown. The value of your pension could fall as well as rise, meaning you could get back less than you paid in. There is no such investment risk with the vast majority of annuities.

How Much Annuity Can I Buy with a £250,000 Pension?

A £250,000 pension pot would purchase you an annuity worth £12,610.44 per year, or around £1,051 per month.

Annuity From £250,000 Pension Pot

Non-indexed annuity

£12,610.44 per year

Male life expectancy at age 65 is 84 years old

Age drawdown pot would run out if replicating a non-indexed annuity

90 years old*

* Assuming constant growth of 4% and inflation at 2%. Calculations correct as of August 2nd 2019

With a £250,000 pension pot you could expect a non-indexed annuity of approximately £1,051 per month. With the right investment strategy and discipline utilising a drawdown arrangement could result in you being able to receive a larger income in retirement, given that taking £1,051 a month would leave you with an income until you’re 90.

What Annuity Will £500,000 Buy?

A £500,000 pension pot would buy an annuity worth £25,416.92 per year, or around £2,118 per month.

Annuity From £500,000 Pension Pot

Non-indexed annuity

 £25,416.92 per year

Male life expectancy at age 65 is 86 years old

Age drawdown pot would run out if replicating a non-indexed annuity

90 years old*

* Assuming constant growth of 4% and inflation at 2%. Calculations correct as of August 2nd, 2019

A non-indexed annuity bought with a £500,000 pension pot provides an income close to the average UK worker’s pay even without taking into account the state pension or any other retirement income.

Should I Index-Link My Annuity?

From the above options, it’s clear that not indexing your annuity leads to a higher initial income. However, if you choose not to protect your pension income from the effects of inflation then its purchasing power could quite quickly get eroded as the price of goods and services rises but your income remains static year-on-year.

Given that annuities are long-term financial products designed to pay out for years if not decades, it may be more sensible to index-link your pension to prevent this from occurring, even if this means a lower initial income.

Expert Advice Finding The Best Annuity

We’ve had to make a lot of assumptions to come up with the above annuity rates, including that each individual is a healthy non-smoker and only wants to buy a single annuity.

If you’re in poor health, smoke, want to buy a joint annuity for you and your partner or have any other special requirements from your pension income then we recommend giving us a call on 02084327333 and talking through your options with one of the advisers.

If you do decide to buy an annuity, it’s important you’ve considered all the facts and made sure it truly is the best option for your retirement. That’s because, once you’ve bought an annuity, there’s no undoing it.

Tom Conner Director at Drewberry

Buying an annuity can often be one of the biggest decisions of your life. If you need some help please do not hesitate to get in touch.

Pop us a call on 02084327333 or email help@drewberry.co.uk.

Tom Conner
Director at Drewberry

I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.

Brendan Kelly
26/09/2019
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Or call us on 0208 432 7333

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