What does a £100,000 pension pot give you?

A £100,000 pension pot might sound like a large amount of cash but you may be surprised by how little income it produces.

Planning for retirement can be a daunting process and working out how much pension you need to live comfortably into your later years can be tough – here we break down how much a £100,000 pension pot will give you.

A £100,000 pension is likely to give you an annual income of between £4,000 and £5,000, which probably won’t be enough to live on during retirement.

This article covers:

• How much pension do I need to live comfortably?
• Is £100k a good sized pension pot?
• How do I calculate my pension income?
• What are my options for withdrawing my pension?
• How much annuity does £100k buy?
• How much will a £100k pension pay?
• How can I boost my pension pot?

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How much pension do I need to live comfortably?

The amount of pension you need to live in comfort depends on your own living standards and bills. What one person considers to be a luxury might be seen as an essential by someone else. 

The Retirement Living Standards, an index which is put together by the Pensions and Lifetime Savings Association, can be a useful guide.

According to this index:

• A single person would need £37,300 a year to live a comfortable retirement
• A couple who are able to share costs would need £54,500

This assumes a lifestyle where you can be more spontaneous with your money. For example, you might be able to afford to have a three-week foreign holiday in Europe every year.

Meanwhile, a moderate lifestyle where you were more cautious with your money would require an income of:

• £23,300 a year for a single person
• £34,000 for a couple with shared costs

If you bear in mind that a £100,000 pension pot might generate an income of about £4,000 to £5,000 a year, there’s a big gap to reach an annual income of £23,300+.

Related content: What does a pension pot worth £37,000, £150,000 and £500,000 give you?

Is £100k a good sized pension pot?

While £100,000 seems like a large sum of money, whether it’s enough to retire on is another question entirely.

However, the answer to the killer question “how much is a £100,000 pension pot worth?” depends a lot on how you want to live in retirement. It also depends on how long you live for, which is something none of us can accurately predict.

The best thing to do is to get a rough idea of how much pension income you could get from that pot each year. We explain how to work this out below.

How do I calculate my pension income?

Here are some steps to give you rough idea of the retirement income you can expect from your pensions:

1. Track down your pensions

The government estimates that people may have 11 jobs throughout their working life, so could end up with 11 different workplace pension pots.

So start by tracking down all your pensions. You could consider combining your pensions to make them easier to manage. We have a quiz to help you decide whether to merge your pension pots.

Dig out pension paperwork or log into online accounts to check your current balances, any income estimates and when you can gain access to your pensions. 

You can tap into a private pension from the age of 55, rising to 57 from 2028. Rules may vary for individual work pension schemes, but you won’t get your state pension until 66 at the earliest.

If you are lucky enough to have any defined-benefit pensions from work, also known as final-salary schemes, they will say exactly how much money you are due to receive.

2. Add on the state pension

Once you have got an idea of the money you have in your private pensions, add on any entitlement you would have in the state pension.

You can check your state pension age here and forecast for what your state pension will be worth here.

Currently, the full new state pension is £10,600 a year. This may not give you a comfortable retirement. But it can be a great supplement to any private or workplace pensions you have built up.

Read more in our guide on the state pension. If you are shopping for a top-rated SIPP, check out our independent ratings here of the best SIPP providers.

What are my options for withdrawing my pension funds?

The amount of income you have in retirement and how long it lasts will depend on how you choose to withdraw your pension funds.

Also bear in mind that the earlier you raid your pension cash, the more chance you have to run out of money and scupper your retirement plans.

By putting off your retirement until later in life, you may be able to take a higher income.

There are several different options: 

1. Take a 25% tax-free lump sum

Everyone is entitled to take out the first quarter of their pension tax-free.

Most people choose to withdraw it in one lump sum. But this does leave less to invest in an annuity or to move into drawdown (as explained below).

The alternative to taking a single lump sum is to opt for a series of ad hoc withdrawals where 25% of each chunk is tax-free. The rest is taxed in the same way as income.

2. Buy an annuity

One choice with some or all of your pension cash is to buy an annuity. This provides the security of a guaranteed income each year for the rest of your life, or for a set number of years.

The annuity rate offered by the provider determines the level of income you receive.

If, for example, the rate is 5%, you will be paid 5% of the value of your pension pot each year.

So say you have already chosen to withdraw the 25% tax-free lump sum from your £100,000 pot, leaving you with a £75,000 pot – your annual annuity payout will be £3,750.

Or if you’re wondering how much the pension pot of £100k will pay per month, the answer is £312.50.

Bear in mind that you can only take the first 25% of your pension pot tax-free. After that any income from annuities or drawdown is taxable.

Find out: should I go for an annuity or drawdown?

How much annuity does £100k buy?

It all depends on general annuity rates at the time, your age, health and lifestyle, the type of policy you choose and your personal circumstances.

If you are relatively old when you buy an annuity – or you are a smoker – the annuity income may be higher. This is because there is less risk to the provider of ending up paying out more than the pension is worth.

Currently, if you use £100,000 to buy a single life annuity starting from the age of 65, the best annuity deal will give a guaranteed income of £4,970 a year, according to figures from the investment platform Hargreaves Lansdown.

This illustration is for a type of annuity called “level” or “fixed” income. You get that security of fixed payments but they won’t increase in future, even if the cost of living goes up.

Taking inflation into account

If you want your income to rise each year to protect against the rate of inflation, you will need to buy an increasing annuity and accept a lower starting point of just £3,273 a year.

In other words, you sacrifice income to begin with. But it will go up over time, unlike with a level annuity where the payments are higher to begin with but may lose their purchasing power.

If you also want the annuity to pay out to your partner after your death, you will need to opt for a joint life annuity and accept even less income.

A best-buy joint life annuity that goes up by 3% a year and continues paying out half after one person dies would start at £2,792 a year.

In exchange for £100,000 these rates may seem low. But they will keep on paying out even if you live far longer than the 20 years annuity providers normally expect.

If your life expectancy is shorter, perhaps because you are a smoker or have health conditions, you may also qualify for bigger payments through an “enhanced” annuity.

Waiting to buy an annuity until you are older will also push up your income.

Read: What type of annuity is best for me?

What will a £100k pension pot buy in later life?

Current rates for that single-life level annuity rise from:

• £3,870 a year as a whippersnapper of 55
• To £7,137 at 75

And you may be able to boost your payout by comparing annuity prices from different providers.

Shopping around could nab you an extra £7,000 over the course of your retirement, per £100,000 of pension pot, according to the Pensions Policy Institute.

Drawdown

Don’t fancy the low rates on annuities? Consider pension drawdown instead.

With drawdown you could take that 25% tax-free cash out of your pension savings and leave the rest invested. But you have the flexibility to dip into these funds when you want.

The money left in your pension pot has the chance to grow bigger through stock market growth – though also leaving you at the mercy of stock market falls.

The amount of income you take is up to you, but if you withdraw too much, too soon, the money might run out, depending on how long you live.

Taking out large sums in any one year could also land you with hefty tax bills.

As a rule of thumb, follow the 4% rule to avoid using up your funds:

• This involves taking out 4% in your first year
• You then increase that income by the rate of inflation each year afterwards

We help you weigh up the pros and cons of drawdown and annuities.

How much will a £100k pension pay?

Using the 4% retirement rule, your income in the first year would be £4,000.

Fast forward 20 years, and your annual income would have tipped up to £4,500.78, assuming 1% inflation.

You would also still have a healthy pension pot of just under £112,050. This assumes 5% growth a year and pension provider charges of 0.45% capped at £200 a year. 

If you wanted to take a more aggressive approach, you could take a higher income of £6,800 in the first year, according to calculations by Hargreaves Lansdown.

With 1% inflation, it would rise to £8,215 in the 20^th year, but after that you would have nothing left in your pot.

The big drawbacks with drawdown are the unknowns. You don’t know how long you will live, or how stock markets will perform. Average growth figures disguise the reality that markets can move up, down and sideways.

If you are forced to withdraw money after markets have fallen, it will be harder for your pension balance to bounce back as markets recover. 

However, you could always combine the two. For example, by using part of your pension pot for an annuity to cover essential bills, while moving the remainder into drawdown.

Find out more about whether you should buy an annuity or go into drawdown.

How can I boost my pension pot?

If you fear you won’t have enough in retirement savings by the time you stop work, there are ways to perk up your pension income.

You can boost your state pension either by:

• Deferring it – that is, asking for it to start when you are older
• Or by topping up any gaps in your national insurance contributions (NICs)

Similarly, if you delay raiding your personal pension, the money will have more time in which to grow.

But the most obvious way to bolster your pension is to pay in more money:

• See if your employer will increase its contributions if you pay more in than the minimum yourself, and then you will benefit from the extra tax relief on pension contributions too.
• Check if your job offers salary sacrifice, where you give up part of your salary in exchange for higher pension contributions, which also saves on income tax and NICs.
• And plough in any extra money from gifts, inheritance or redundancy pay. 

We have also outlined eight simple ways to give your pension pot a boost.

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