What does a £1m pension pot buy?

Important information: the value of investments can go down as well as up so you may get back less than you invest.

Of course, there is no ‘one-size-fits-all’ answer to this question. Your overall wealth, health and wellbeing will play a role, not to mention your ongoing financial responsibilities. You may have adult children or grandchildren you need to support, or a bit of the mortgage left to chip away.

But if you’re one of the 1 in 10 men who will live to 96 or 1 in 10 women who’ll live until 98, you’ll need a £970,300 or £1,032,900 respective pension pot to live moderately if you retire at 65 (the Pensions and Lifettime Savings Association's research says you'll need £31,300 per year to live moderately¹). If you're eligible, your state pension will help. For 2024/5 it stands at £11,500 per year.

• See our current offers to help your money go further, including our latest cashback offer.

What does a £1m pension pot buy you?

If you choose to buy an annuity, an insurance product offering you an income for life, you can bargain on anywhere between £38,711 and £64,461 a year, depending on the type of annuity you buy, as the table^* below shows:

Current annuity rate examples

^* Annuity rates as at 6 December 2024 from HUB Financial Solutions - based on a healthy 60-year-old male living in London with pensions savings of £1m 

Thanks to pension freedoms, however, many people now choose to keep their pension invested and opt for pension drawdown. Pension drawdown gives you the flexibility to take whatever income you want – and change it when you need to. Your money stays invested so it has the potential to continue to grow and it can get passed onto your loved ones when you die. To work out what a sustainable drawdown strategy might look like, have a play on our Pension Drawdown Calculator.

Another attraction of drawdown is that if you have money left in the pot when you pass away, this can be left to your nearest and dearest. If you pass away before age 75, they can currently access the money in your pot tax free. After age 75, they will pay tax in line with their marginal rate of income tax. Please note under plans announced in the Budget in October, the government will begin to include pensions in estates for Inheritance Tax (IHT) purposes from April 2027.

• IHT on pensions to push wealthy families into 80% plus tax

But to answer the question: ‘How much will £1m buy you in pension income?’  You’re looking at a gross annual income of around £40,000 if you base it on the widely used 4% rule (also known as the Bengen rule). In theory, this 4% rule allows you to take a steady stream of income while maintaining a sufficient amount of funds that can be used to provide an income in future years - so that your retirement pot lasts as long as you do. But is that enough? Now, that’s a question only you can answer.

If you’d like to know more about how to make your pension last - our principles for good investing pages are really worth a read.

And if you’re starting to think about your retirement, the government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Source:

¹ Retirement Living Standards, Pensions and Lifetime Savings Association.