I’ve been reading an article in the Times (for Times readers) and I’m pretty struck by this section, by the impact it would have on anyone close to retirement nearing the average “pension pot” of £37k.
Even though the average Times reader is probably richer than those who don’t, I think they’d be shocked to think that their average retiree at 66 has accumulated only £37,000 privately for the rest of their life
What does a £37,000 pension pot give you?
The average pension pot is worth about £37,000 at retirement. So, what could you do with that, assuming that you retired at 66?
The following examples should give you some idea. Remember that withdrawals from pensions are taxed as income and there may be other tax limits or pensions rules to abide by, which also may change over time.
Take a 25% lump sum and do pension drawdown
If you took the 25% tax-free cash as a lump sum from your private or workplace pension, you would have £9,250 to spend, pay off debts, save in a high-interest cash account or invest elsewhere.
That would leave you with £27,750 in your pension.
With a drawdown strategy you might withdraw 4% of your pension each year. In investing parlance this 4% figure is called the natural yield, which means it’s the amount of income that low-risk investments are expected to produce each year.
Someone with £27,750 who withdrew 4% a year would have £1,110 annually, or £92.50 a month.
Assuming that you were entitled to the full state pension of £11,502 a year, your estimated pension income would be £12,612 a year or £1,051 a month, when adding the drawdown income.
The personal allowance, or amount you can earn before income tax is due, is £12,570 for 2025/26. So, an income of £12,612 from pension drawdown and the state pension would push you over the personal allowance by £42, meaning you would pay the basic rate of tax at 20%, which would be £8.40.
Don’t take a lump sum, just go into drawdown
If you chose not to take the 25% lump sum, you could instead go into drawdown with the full £37,000 pension pot.
Withdrawing 4% a year would give you an income of £1,480 a year, or £123 a month.
Add that to the full state pension amount of £11,502 and you would have an annual income of £12,982, or £1,081 a month.
Again, you would have an income that’s just high enough to pay the basic rate of income tax, which would work out at £82.40.
Buy an annuity
How much a saver can get from an annuity depends on their personal circumstances and the specific features of the product. Also, annuity rates rise and fall with changes in bond markets – because insurers rely on income from investments to fund annuity payments.
A single person aged 66 in good health could potentially swap their £37,000 pension for an annuity paying £1,976 a year or £164 a month.
This assumes the annuity is index-linked, meaning the payment rises each year in line with the retail price index (RPI) measure of inflation.
Take a lump sum and buy an annuity
If you took a 25% lump sum of £9,250, that would leave £27,750 to purchase an annuity.
With that amount, a single 66-year-old could purchase an annuity paying £1,441 a year or £120 monthly, according to the MoneyHelper annuity calculator. This makes the same assumptions as in the example above.
That’s extremely assiduous by the Times and those who helped them. Even more arduous must have been multiplying all the numbers to find out what you’d get from an £150,000 pot (four times as much) and 13.5 times for those with half a million (£500,000).
Living on the pot is an extremely hard thing to do. Thanks the Times and the PLSA for pointing this out with numbers. I suspect the picture of someone counting the change from the purse can be replaced by this photo of people using their phones from their pot!
