11 April 2023 | 3 minute read
Many retirees opt to buy an annuity to get a guaranteed retirement income. Rising interest rates mean the amount of retirement income you can get from an annuity is looking more attractive than it has for many years.
Figures show someone with £500,000 in pension savings who buys an annuity at age 66 could currently expect annual retirement income of nearly £29,000 a year1. This is less than the £37,300 net annual income which the Pensions and Lifetime Savings Association says is required to fund a ‘comfortable’ retirement for the average single person2.
A guide to saving for retirement
Jam-packed with essential information on how to save for a more comfortable life after work.
Download guide
Thanks to the pension freedoms that came into effect in April 2015, you have a lot more choice about what you can do with your pension pot. You no longer have to buy an annuity and income drawdown is available to everyone. But all this choice means that making the right decision has become a great deal harder.
More choice, but more thought needed
Retirees today have far greater flexibility when it comes to accessing the money in their pension pot. However, with this flexibility comes the possibility of making the wrong decisions. Under income drawdown, there is a risk that drawing too much income each year could see you using up all of your pension fund within your lifetime, leaving you short of the income you need.
Some people may shun annuities because they want to pass on their pension pot on death. But if they live longer than expected, there may be nothing to pass on and they may even run out of money.
So, if you have a £500,000 pension pot, what could you consider doing with it? First of all, you need to think about more than just your pension savings. A financial adviser will look at your broader personal and financial circ*mstances to ensure your retirement income strategy meets your needs and that all the risks are fully considered.
Best to consider all your finances
It is wise to consider all your assets and savings, not just your pension, whenplanning your retirement income. For example, someone who has other investments available to them could find that the tax applying to their pension fund on death could be lower than the inheritance tax on other assets in their estate. They may well be best served by accessing other funds for income in retirement and preserving their pension pot.
Meanwhile, if your pension is your main income source for the rest of your life, income drawdown on its own might not be the best choice because the risk of exhausting your fund could be too high. Although annuities have fallen in popularity, buying an annuity with at least part of your fund could still be a good way forward.
If we assume for the sake of income drawdown that the £500,000 pension fund grows at 5% a year after charges and that the income increases annually with inflation, then that fund could provide annual income of around £31,000 from age 66 until age 87. For those with more modest needs, the fund could provide a £25,000 annual income until age 95.
Trust the experts
The sensible route is tospeak to an adviserand take a complete approach to all your assets. Income drawdown might be the right approach for some people, whereas others could be better off spending other assets and leaving their pension alone. Buying an annuity with part of your pot is another potential solution to consider.
Taking some smart advice can help you make an informed decision about how to access your money in retirement. By taking a holistic look at your finances, an adviser can find the best way of achieving your retirement aspirations.
Find out more from our dedicated customer support team based in Edinburgh by calling us on 0333 207 9003, or by sending an email to customer.services@brewin.co.uk. Opening hours: Monday – Friday 8 am to 6 pm, and Saturdays 8 am to 12 pm.
1Annuity assumptions: single life, monthly in advance, no guarantee period, non-smoker, standard (healthy) rates, 2% indexation, payable for life. Quotes obtained from Iress on 05/04/23.
2http://www.retirementlivingstandards.org.uk/
Sign up to our newsletter for expert insights on investing for the future, saving for retirement, passing on assets to the next generation, and much more.
Subscribe
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circ*mstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.
Related
FAQs
An individual who buys an annuity at age 66 could expect gross retirement income of around £56,000 a year from a £1m pension fund or just under £28,000 a year from a £500,000 pension fund2. Annuity income is guaranteed for life, so you would receive the same annual income regardless of how long you live for.
How much will $500,000 pay in retirement? ›
Depending on how you manage your money, you can probably expect an annual income between $48,000 (at roughly $4,000 per month) and $63,000 (at roughly $5,300 per month). More is possible if you invest for more aggressive returns, but that will mean taking on more risk.
How much will a $500 000 annuity payout? ›
You can also generate a monthly income using fixed annuities. A $500,000 annuity would pay you $29,519.92 per year in interest, or $2,395.83 per month if you prefer to set up systematic withdrawals of interest.
What percentage of people retire with $5000000? ›
Data from the Employee Benefit Research Institute, based on the Federal Reserve's Survey of Consumer Finances, reveals that a mere 0.1% of retirees manage to accumulate over $5 million in their retirement accounts, whereas only 3.2% amass over $1 million.
How long will $5000000 last in retirement? ›
Assuming a life expectancy of 90 and thus a retirement term of 29 years, $5 million would break into $172,414 annually or $14,368 monthly. That possible annual and monthly distribution amount reduces as you apply different retirement ages but will likely still cover your needs if you exit the working world early.
Can you live off the interest of $500,000? ›
Key Takeaways
It may be possible to retire at 45 years of age, but it depends on a variety of factors. If you have $500,000 in savings, then according to the 4% rule, you will have access to roughly $20,000 per year for 30 years.
What percentage of retirees have $2 million dollars? ›
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
How much interest will $500,000 earn in a year? ›
If you were to place $500,000 in a high-yield savings account with a 2.15% APY and wait one year, you will have earned $10,750 in interest. This rate is likely insufficient to keep up with annual inflation, which means your money will become less valuable at a higher rate than when it's accruing interest.
What monthly income can I get for $100,000 annuity? ›
A $100,000 immediate income annuity purchased at age 65 could provide around $614 per month. With a 5% interest rate and a 10-year payout period, the same annuity might pay approximately $1,055 monthly. At age 70, a similar annuity could offer a lifetime payout of around $613 per month.
What is the annuity payout for 1 million dollars? ›
A $1 million annuity could pay $6,073 a month for a 65-year-old woman purchasing an immediate single life annuity. Annuity providers calculate the monthly payout of a $1 million annuity based on factors such as the type of annuity and the annuitant's age and gender.
Super wealthy (99th percentile): $16.7 million. Wealthy (95th percentile): $3.2 million. Well off (90th percentile): $1.9 million. Middle class (50th percentile): $281,000.
What does the average American retire with? ›
Here's how much the average American has in retirement savings by age
| Age Range | Average Retirement Savings |
|---|
| 45-54 | $313,220 |
| 55-64 | $537,560 |
| 65-74 | $609,230 |
| 75 or older | $462,410 |
2 more rowsMay 5, 2024
By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds. Seamless transition — roughly 80% of your pre-retirement income.
What is a good monthly retirement income? ›
Average Monthly Retirement Income
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
Can I retire on $500,000 plus Social Security? ›
Most people in the U.S. retire with less than $1 million. $500,000 is a healthy nest egg to supplement Social Security and other income sources. Assuming a 4% withdrawal rate, $500,000 could provide $20,000/year of inflation-adjusted income. The 4% “rule” is oversimplified, and you will likely spend differently.
What percentage of retirees have $3 million dollars? ›
Specifically, those with over $1 million in retirement accounts are in the top 3% of retirees. The Employee Benefit Research Institute (EBRI) estimates that 3.2% of retirees have over $1 million, and a mere 0.1% have $5 million or more, based on data from the Federal Reserve Survey of Consumer Finances.
How much will 500k give me in retirement? ›
On average for a comfortable retirement, an individual will spend £43,100 a year, whilst the average couple in retirement spends £59,000 a year. This means, if you retire at 55, £500k will fund an individual for 12 years and a couple for 8 years.
Can I retire at 62 with $400,000 in 401k? ›
Can I Retire at 62? You can retire a little early on $400,000, but it won't be easy. If you have the option of working and saving for a few more years, it will give you a significantly more comfortable retirement.
What is the average 401k balance for a 65 year old? ›
Average and median 401(k) balances by age
| Age range | Average balance | Median balance |
|---|
| 35-44 | $91,281 | $35,537 |
| 45-54 | $168,646 | $60,763 |
| 55-64 | $244,750 | $87,571 |
| 65+ | $272,588 | $88,488 |
2 more rows3 days ago
Average Rate of Return: This is more difficult to calculate because by their nature private equity firms and hedge don't always report their losses and earnings. However, most estimates suggest that you can expect average returns of up to 14%.
