what's the estimated monthly or annual income from a £900,000 retirement fund?
In the coming years, a 59-year-old individual is planning to retire, having amassed a substantial pension pot of £900,000. This sum opens up various options for securing a comfortable retirement income.
Annuity Income
One of the most popular choices for pensioners is an annuity, which provides a guaranteed income for life from an insurance company. Recent annuity rates for a healthy 65-year-old single life annuity typically range near 7.7% to 7.9%. With this rate, a £900,000 pension pot could yield approximately £70,000 per year in guaranteed income.
However, it's important to note that once an annuity is purchased, the decision cannot be reversed.
Drawdown and UFPLS Options
Another option is drawdown, which allows for flexible withdrawals from the pension pot. The income depends on investment performance and withdrawal rates. Alternatively, Uncrystallised Funds Pension Lump Sum (UFPLS) lets you take lump sums, with 25% tax-free each time, and the remaining 75% taxable at your marginal rate.
Inheritance Tax Implications
Under current UK rules, if the individual dies before age 75, their remaining pension fund can typically be passed to their wife free from Inheritance Tax (IHT). If they die at or after 75, pensions withdrawn by the beneficiary are subject to income tax but still usually outside the IHT estate.
Tax Considerations
Annuity payments are taxable as income, while drawdown withdrawals beyond the 25% tax-free portions are also taxable income. UFPLS withdrawals include 25% tax-free and the rest taxed as income.
Summary
The £900,000 pension pot offers various options for the individual. An annuity provides a guaranteed income for life, while drawdown and UFPLS offer more flexibility but with variable income and tax outcomes. Pension pots generally do not count towards IHT on death, so the wife can inherit the remaining fund without IHT, with tax depending on the age at death and method of withdrawal.
For personalized tax planning or specific drawdown strategies, consulting a financial adviser is recommended. Charles Stanley Direct offers a free, no commitment, 15-minute call with a qualified professional to discuss pension options.
The '4% rule' suggests that one can safely generate £36,000 a year before tax, rising with inflation, from a pension pot. However, flexibility may be needed with withdrawals from drawdown in case of poor investment performance.
Deferring State Pension can allow for higher early pension withdrawals, which can be dialed back once State Pension begins. The individual can choose between two main options for their pension pot: keeping it invested and drawing a regular or flexible income, or buying an annuity. An adviser can help understand risks and opportunities and potentially add significant value from a tax perspective.
Charles Stanley Direct also offers further financial coaching or more in-depth and specific financial advice if needed. The '4% rule' is based on historical stock and bond returns and is thought to ensure the money lasts 30 years, even through relatively poor periods.
- Seeking financial advice from a professional could be beneficial when deciding between using the pension pot for an annuity, drawdown, or Uncrystallised Funds Pension Lump Sum (UFPLS), as an adviser can help understand the risks and opportunities, potentially adding significant value from a tax perspective.
- For those interested in investing their pension pot to secure a regular or flexible income, Charles Stanley Direct offers further financial coaching or more in-depth and specific financial advice, as well as a free, no commitment, 15-minute call with a qualified professional to discuss pension options.
