What's the estimated income from a £900,000 retirement fund?
A retirement pot of £900,000 offers a substantial income for the golden years. Here, we explore two main options for this pension pot: drawdown and annuity.
Firstly, drawdown allows you to keep your pot invested and draw a regular or flexible income. With the common 4% withdrawal rule, you could safely generate an annual income of around £36,000 before tax, rising with inflation. This amount would support a monthly income of approximately £3,000, pre-tax.
On the other hand, an annuity offers a guaranteed lifetime income. By exchanging the pot, a 61-year-old could secure an annual income of 6.82% on a level basis and 4.44% on an inflation-linked basis on a £900,000 pot, assuming a 5-year guarantee period and 50% spouse's pension. This translates to around £42,590 annually from the private pension pot alone, combined with approximately £12,272 from the State Pension, making a total yearly income of about £54,862.
It's essential to consider the risks involved. Drawdown is a riskier alternative but can keep the pot growing beyond inflation levels. Asset class returns significantly lower than historical averages could present difficulties, especially in the event of a market crash in the early years of retirement.
Tax efficiency is another factor to consider. You can take up to 25% of your pension pot tax-free from age 55. The remaining withdrawals or annuity payments are taxable as income. For inheritance, defined contribution pots usually pass to your spouse without a tax charge if paid before age 75; after 75, withdrawals by your surviving spouse are taxed as income. Annuities generally do not pass on, but some offer spousal benefits.
In your specific case, you are 59 years old and plan to retire in two years. The annuity income would be approximately £46,021 or £29,961 per year, respectively, after taking the maximum tax-free cash of £225,000.
A financial adviser can help weigh up options, model different scenarios, understand risks and opportunities, and potentially add significant value from a tax perspective. For instance, deferring State Pension can potentially allow for higher initial withdrawals from the pension pot, and tax efficiency can be achieved by taking the maximum tax-free pension lump sum in one go, paying off a mortgage, or using it to make Isa contributions.
Moreover, flexibility in withdrawals may be necessary to help preserve the pension pot in the event of poor investment performance. Mixing and matching an annuity and drawdown is also possible, allowing for essential spending to be matched with an annuity and discretionary spending with drawdown.
In summary, the choice between drawdown and annuity depends on your risk tolerance, retirement goals, and tax circumstances. A financial adviser can help tailor these figures to your exact circumstances, ensuring you make the most of your retirement income.
Considering the risks and potential benefits, it would be wise to seek financial advice when deciding between investing in drawdown or purchasing an annuity for your pension pot. Financial advice could help optimize your personal-finance situation by taking into account factors like your risk tolerance, retirement goals, and tax circumstances, thus providing a more suitable insurance policy for your financial future in the realm of personal-finance management.
