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How Big Does A Retirement Pension Pot Need To Be?

pot of gold (art)How Much Money Do You Need To Generate Your Desired Level Of Retirement Income?

This week, Gary Keeley, the founder of The Workplace Pension Consultancy, talks to use about pension plans, and most importantly, how big a pot needs to be.

Your pension pot generates much of your post-retirement income. So what is it exactly, and what factors should you consider to make sure yours fits your needs?

There comes a time, preferably sooner rather than later, when you start thinking about what happens when you retire, and what sort of income you’d like to have in order to live a comfortable life. You may have various sources of income such as investments, or rent from property. For most people, an important part of their post-retirement income will come from what is known as their pension pot.

This is the total amount of money that has been saved into a pension scheme, which can be used in various ways to generate income. How big does a pension pot need to be? It depends on how much income you expect to receive from it, taking into consideration your other sources of income, including your state pension. The amount you get from your pension pot also depends on what you choose to do with it. Essentially, the main choices boil down to annuities, drawdown, and investments.


An annuity provides a guaranteed income for life. This is the most secure way to use your pension pot, but annuity rates are low. Rates vary between different providers, but a pension pot of £300,000 can be expected to generate a fixed income of around £18,000 a year. Get an estimate of the sort of annuity income you can expect by using an online calculator like this one.

You should be aware, however, that normal annuities are not linked to inflation, so the value of the income will fall with time. There are index-linked annuities but the initial annual income from these is much lower.

Your health and lifestyle can also influence your annuity. Serious illnesses like cancer, more common conditions like diabetes or high blood pressure, and lifestyle choices like smoking all affect your life expectancy, and if any of these apply to you, then you will be eligible for an enhanced annuity (also known as impaired life annuity, ill health annuity, or smoker annuity).


Instead of an annuity, you can also leave your pension pot invested, and receive income by withdrawing money from it. This might suit someone moving to part time employment, in order to provide top-up income. There are complex rules about this, but you can use a drawdown calculator to work out how much you could get. However, drawdown is not considered a viable option if your investments are under £100,000.


As an alternative to an annuity, you can invest your pension pot, and get your income from the investments. In order to reduce the risk, you should have a diversified portfolio with different types of asset. Then, if things don’t go as well as expected, they are less likely to all suffer at the same time. You can build up your own portfolio by buying funds that hold shares, bonds or property. If you don’t want to do this for yourself, you could have the professionals do it for you by investing in one or more “multi-asset income funds”. Your initial income will be less than from an annuity, but over time, if you just take the yield and avoid selling units, then your capital should grow. The funds that own shares or property should also pay a growing income.

All investments carry some risk. As they say in the standard warning, the value of your investment can go up as well as down. Pension funds are supposed to be low risk investments, but there are some funds which pay a higher income with greater risk, or at the cost of sacrificing some chance of future growth. It is generally recommended that you should only hold one or two of these funds as part of a diversified portfolio. This approach is also known as a SIPP (self-invested personal pension).

Mix and Match

You can of course choose to buy an annuity with part of your pension pot, and invest the rest. That way you get the safety net of a guaranteed income for life, as well as the potential benefit of growth in your investments. This is an increasingly important consideration as people live longer than they used to in the past. If most of your pot goes into an annuity, you might feel that you can afford to take more risks with your investments and put them into riskier, high-income funds.

Most of us hope to retire on good health and with sufficient income for a comfortable and enjoyable life. The sooner you start saving for your pension, the better off you will be in the long run. The size of the pension pot needed to provide a comfortable level of income depends on various considerations, including the level of risk you are prepared to accept, and your health and lifestyle when you retire. This can be a complex matter, so it’s sensible to give it careful thought, and to discuss your needs with your financial advisor.

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