Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

How much is my pension worth as an annuity?

What Annuity Can I Buy With My Pension Pot?

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 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.

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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?

Pension drawdown is 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 thanks to the current low annuity rates.

Whether or not this 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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Pensions Advice

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Income Protection
 

What is the best Annuity for a £50,000 Pension Pot?

According to the Drewberry Annuity Rates Calculator, a £50,000 pension pot would buy you an annuity of £2,637.72 per year. That’s a monthly income of around £220.

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

The pension drawdown figures 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 £50,000 Pension Pot

Non-indexed Annuity

£2,637.72 per year

Indexed Annuity

£1,621.08 per year

Male life expectancy at age 65 is 86 years old

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

100*

Age drawdown pot would run out if replicating an indexed annuity

113*

smaller pension pots may not be suited to drawdown says senior paraplanner at Drewberry Jonathan Cooper

With a smaller pension pot, there’s a very small window between the age at which your pension will run out if replicating an indexed annuity and a man’s life expectancy at 65. While it should just last until 86 with two years to spare, life expectancy is rising all the time so there’s no guarantee you won’t need your pension income for longer than you think.

There’s much more leeway, however, if you choose to replicate an indexed annuity, i.e. one that will rise each year in line with inflation. Here you get a smaller initial amount in exchange for the fact you’ll see increases in line with prices each year.

Jonathan Cooper
Senior Paraplanner at Drewberry

Given the pension pot is projected to run out at age 113 if mimicking an index-linked annuity, this would imply you may be able to take a higher income from your pension pot without exhausting it.

* assuming constant growth of 4% and inflation at 2%

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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 £5,208 per year. This is based on the same metrics as above and would provide a monthly income of around £434.

Income From £100,000 Pension Pot

Non-indexed Annuity

£5,208 per year

Indexed Annuity

£1,621.08 per year

Male life expectancy at age 65 is 86 years old

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

100*

Age drawdown pot would run out if replicating an indexed annuity

111*

It is important to recognise the additional investment risk which comes with taking your retirement income via pension drawdown. However with sensible growth targets you can expect to draw the same income as you would receive from an annuity for an additional 14 years beyond life expectancy.

* assuming constant growth of 4% and inflation at 2%

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Very happy with the advice I received from Jake Beale at Drewberry on my income protection. All sorted in two short easy phone calls.

Phil Walker
07/11/2017
 

How Much Annuity Can I Buy with a £200,000 Pension?

A £200,000 pension pot would purchase you an annuity worth £10,426.44 per year, or around £869 per month.

Annuity From £200,000 Pension Pot

Non-indexed Annuity

£10,426.44 per year

Indexed Annuity

£6,334.08 per year

Male life expectancy at age 65 is 86 years old

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

100*

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

115*

With a £200,000 pension pot you could expect a non-indexed annuity of approximately £869 per month. With the right investment strategy and discipline utilising a drawdown arrangement could result in you being able to receive a significantly larger income in retirement.

* assuming constant growth of 4% and inflation at 2%

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What Annuity Can I Get With £400k?

A £400k pension pot would buy an annuity income of £20,888 per year, equivalent to approximately £1,741 per month.

Annuity From £400,000 Pension Pot

Non-indexed Annuity

£20,888 per year

Indexed Annuity

£12,465 per year

Male life expectancy at age 65 is 86 years old

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

100*

Age drawdown pot would run out if replicating an indexed annuity

116*

Even at the lowest projected growth rate of 2% each year, a £400,000 pension pot would still last an individual until the age of 97 if replicating an indexed annuity, well beyond the average life expectancy of today’s 65-year-olds.

Neil Adams
Financial Adviser at Drewberry

* assuming constant growth of 4% and inflation at 2%

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What Annuity Will £500,000 Buy?

A £500,000 pension pot would buy an annuity worth £26,119.44 per year, or around £2,177 per month.

Annuity From £500,000 Pension Pot

Non-indexed Annuity

£26,119.44 per year

Indexed Annuity

£15,529.44 per year

Male life expectancy at age 65 is 86 years old

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

100*

Age drawdown pot would run out if replicating an indexed annuity

117*

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 income you might receive in retirement. If you buy an indexed annuity, that plus the state pension would almost be equivalent to the average UK salary for your retirement.

* assuming constant growth of 4% and inflation at 2%

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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.

Peter Banks
Wealth & Investments Expert at Drewberry

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Expert Advice Finding The Best Annuity

Ask Neil Adams, pensions and investments expert at Drewberry, for personalised annuities advice

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.

Neil Adams
Pensions & Investments Expert at Drewberry

The sums seem to stack up better with pension drawdown if you’re replicating an indexed annuity income, but there’s no guarantee this will be right for you. Talk through your retirement options with an expert before making any decisions on how to access your pension.

A joint annuity or an annuity with a guarantee period will usually reduce your annuity rate, as the company foresees having to pay out an income for a longer period and so cuts the amount you’ll receive initially.

Comparing an annuity vs pension drawdown

On the other hand, an annuity for someone who smokes or isn’t in good health will typically have a higher rate than for a healthy person, as the likelihood is the person in poorer health won’t be receiving the annuity for as long.

For simplicity’s sake, we’ve assumed the above annuities are purchased by someone aged 65; however, the older you are when you buy an annuity the better your annuity rate.

All of the above factors will have an impact on the comparison between an annuity and pension drawdown and whether one works out to be more favourable than the other for you as an individual.

tom conner, director at Drewberry

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.

Why not get an expert to look over the numbers for you as an individual to see whether pension drawdown or an annuity works out most in your favour? The team at Drewberry is here to help – we’re available on 02084327333.

Tom Conner
Director at Drewberry

Compare Top 10 Annuity Rates
 
Takes approx. 60 seconds
Pension Fund
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Smoker

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