What’s A Good Pension Pot At 55?

How Much Pension Do I Need for an Annuity?

Buying an annuity sees you swap all or some of your pension pot for a regular income for the rest of your life. This income is guaranteed and will pay out no matter how long you live for.

How much you’ll receive from an annuity is dependent on a number of factors, such as:

• Your age
  The older you are when you buy an annuity pension the better your annuity rate, as the company assumes they’ll be paying out an income for less time
• Your health
  If you’re in poor health, consider an enhanced annuity for a better annuity rate
• Your smoker status
  Smokers get better annuity rates because of their higher mortality risk, and may also quality for enhanced annuities
• Whether you want a joint annuity
  This will provide a pension for a partner after you pass away
• If you want to index-link your annuity
  An index-linked or escalating annuity pension receives a lower annuity rate initially to compensate for the fact that it will rise over time to maintain pace with inflation
• Your postcode
  Different parts of the country have different life expectancy, so your annuity rate will be based on your home postcode.

Today’s 55-year-olds have a state pension age of 67, so we’ll assume they want to retire then. We’ll also assume they’re in good health, a non-smoker, are looking for a single annuity and live in the same postcode as our Brighton-based financial advisers.

If you wanted to retire early, say at 60, you’d need a larger pot because you’d be drawing on the pension for longer. To retire at age 60 with an annuity worth £20,000, you’d need to trade in a bigger pot — around £465,000.

This doesn’t even account for the fact that you’d probably require a higher income initially to bridge the gap between you retiring at 60 and the New State Pension kicking in at 67.

What Pension Do I Need for Drawdown?

Income drawdown, also known as flexi-access drawdown or simply drawdown, works differently.

Here, your pension pot stays invested in the markets and you draw down an income from it. You can adjust this income up and down as needed, unlike an annuity, where the amount you’ll receive is fixed (unless you opt to index the annuity so it rises with inflation each year).

However, whereas an annuity offers guaranteed income for life, the risk with a drawdown pot is that it may run out.

As such, one of the most important calculations when figure out how much you’ll need in your pension is working out how long you’ll live and therefore how long you’ll need the pension for.

According to life expectancy statistics from the Office for National Statistics, a man age 67 has a further 17 years on average to live (surviving to 84), while a woman can expect to live for a further 19.3 years (surviving to almost 87).

A man would need a pension pot of £582,805 if he wanted to draw down £20,000 a year for 17 years (assuming inflation over this period of 2% and pot growth of 4%). A woman would require a pension pot worth £597,120 to draw down £20,000 a year for almost 20 years working on the same assumptions.

You can use our Pension Pot Calculator below to work out how much your pension will be worth at retirement based on the current size of your pension pot and your current pension contributions. Then use that figure to work out how long your pension would last if you choose to use income drawdown to fund retirement.

What’s The Best Pension At 55?

The absolute maximum you can save into a pension each tax year is 100% of your earnings or £60,000. This is known as your annual allowance.

High-earners are able to pay in less, thanks to the tapered annual allowance that potentially whittles their available pension annual allowance down to as little as £10,000.

If you haven’t made any contributions, or haven’t made full use of your contributions, for the past 3 years then you have the potential to carry forward those contributions into the current tax year.

Without carry forward, the maximum £60,000 contribution each year means in the 12 years between age 55 and a 55-year-old’s State Pension Age of 67, you have the potential to save up to £720,000 into a pension.

However, this is impractical for a number of reasons, not least because it’s unlikely to be affordable for most people. Alternatively, £60,000 may be above the annual allowance available given the annual allowance is capped at the lower of £60,000 or 100% of earnings.

The average person aged 50-59 working full-time is earning £31,391 according to the Office for National Statistics. Assuming they save 10% of their income (including both employer and employee contributions), this amounts to £3,139.10 per year, or £37,669.20 over the 12 years left to State Pension Age for a 55-year-old.

Given we know we need a pension pot of £370,500 to generate that £20,000 annuity, this means at 55 you should ideally have over £300,000 in your pension if you want to retire on the average UK salary by age 67 using an annuity. This will be added to the £37,669.20 you might generate in the 12 years leading up to age 67.

Assuming you start saving at age 25, you’d need to put away around £440 per month to generate a pot of more than £300,000 by the time you’re 55 according to our Pension Pot Calculator. This includes both employer and employee contributions and assumes a growth rate of your pension of 4%.

To have a pot worth £370,500 by age 67, again assuming you start saving at age 25, you’d need to save £284 a month for the 42 years between age 25 and retirement. This includes both employer and employee contributions and again assumes a growth rate of 4%.

Can I Retire At Age 55?

Whether or not you can retire at 55 depends on a number of factors.

Firstly, you’ll likely need a defined contribution pension, as few defined benefit or final salary schemes allow a retirement date of 55.

Secondly, you’ll need to consider how much income you want in retirement, how you’ll generate it and whether it’s affordable to stop working so early.

Today’s 55-year-olds have a State Pension age of 67, so you have 12 years of pension income to fill in if you retire early that you won’t be getting from the state.

To generate an annuity worth the average UK salary of £27,976 at age 55 — to cover the fact that you won’t be in receipt of the State Pension for more than a decade — you’d have to have a very large pension pot worth around £720,000. This is because the annuity company assumes they’ll be paying for an annuity for much longer given how young you were when you started claiming it.

If you wanted to enter drawdown at 55 and pull an income worth £27,976 each year from your pension, you’d need a pot of £640,000 to last you until age 86 (the average life expectancy for a man and a woman at age 55) assuming growth at 4% and inflation at 2%.

However, while this would be sufficient until you were 86, your pot would then be exhausted. Men aged 55 today have an 9.2% chance of living to 100, while women at age 55 have a 13.7% chance according to Office for National Statistics life expectancy data — clearly you might need a lot more in reserve based on these figures.

How Long Will My Pension Last?

With an annuity, your pension will last as long as you do. This is because an annuity is a promise to pay you a guaranteed pension income for the rest of your life, no matter how long that might be.

With an annuity, if you’re planning to retire at 55, you’ll need a significantly larger pot that if you are looking to retire closer to State Pension age because of the additional years you’ll be drawing on a pension income.

As such, to retire on the average UK salary with an annuity at age 55, you’ll need to save up more each month and perhaps even start saving earlier to meet your retirement goals.

With drawdown it’s more complicated — your pension only lasts as long as you can make it last. It’s a finite pot of money and can therefore be exhausted if you take too much too soon. It’s also invested in the markets, which means that its value can fall as well as rise, meaning you may get back less than you invested.

Drawdown also requires a lot of guesswork surrounding life expectancy that’s taken out of the equation when you purchase an annuity. You need to take a sustainable level of income from your pension pot to ensure it lasts as long as you live, but how long might that be?

Use our Pension Income Drawdown Calculator below to model how long your pension might last in drawdown.

If you’re approaching 55 and want to look at your pension options, don’t hesitate to get in touch.

You have a number of important decisions to make as you reach the age where you can access to your defined contribution pension savings, including how and when you want to take your pension.

It’s essential you get these right to get the retirement you deserve, which is where an expert can step in to help.

Your Financial Plan: Build A Better Future

A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.

• See your financial future
  We use sophisticated financial modelling technology to visually show you your financial future. A living financial plan where you can clearly see what you can achieve depending on the decisions you make — read more
• Achieve the retirement you deserve
  Can afford that dream round-the-world trip? Can you help your children onto the property ladder? We’ll model your goals and build your financial plan to help you achieve them.
• Our expertise saves you time and provides peace of mind
  Organising your pensions, investing your assets, managing risk and making the most of your tax allowances is all taken care of as part of your financial plan.
• We’ve got bargaining power on our side
  This allows us to negotiate better rates for you than dealing with providers yourself.
• You’ll speak to a dedicated expert from start to finish
  You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
• Benefit from our 5-star service
  We pride ourselves on providing a 5-star service, as can be seen from our 3893 and growing independent client reviews rating us at 4.92 / 5.
• Gain the protection of regulated advice
  You are protected. Where we provide a regulated advice service we are responsible for the decisions we help you make. Doing it yourself or going direct to a provider won’t provide this protection, so you won’t benefit from these securities.