How much can a £100,000 pension pot get you in retirement?

Couple looking at pension documents
Thousands of over 55s have been emptying their smaller pension pots before retirement
Temi Laleye

By Temi Laleye

Published: 10/07/2024

- 09:24

Rising interest rates have caused annuity incomes to soar by 52 per cent since June 2021

Britons are urged to lock in an annuity rate now as high interest rates may not be around for much longer.

With an interest rate cut expected to come in August/September, annuity rates could start to drift downwards.

Interest rates have been on the rise since 2020 and has now been kept at a 16-year high in an attempt to slow consumer prices rising.

Annuities used to be seen as something of poor value and inflexible but this has changed as rising interest rates caused annuity incomes to soar

Since the mini budget in 2022, a 65-year-old with a £100,000 pension could get up to £7,586 per year from a single life level annuity with a five-year guarantee.

This is 52 per cent higher than the £4,979 per year someone in the same position could get back in July 2021.

As interest rates have been held, annuity incomes have settled, with the same person currently able to get up to £7,217, but this could soon change.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: "Annuities had a reputation for being poor value and inflexible, but this has changed as rising interest rates caused annuity incomes to soar.

"Data from the ABI hailed 2023 a bumper year for annuities, as people rushed to lock into great rates for their guaranteed income. However, after years of riding high, there are signs that these rates may not be around for much longer, as rumours swirl that the Bank of England is looking to cut interest rates in the coming months.

"This would indicate annuity incomes will also start to fall back, though it is fair to say that any cuts from the BoE will likely be gradual – annuities will continue to offer good value for some time yet. However, it might be the spur for those who were undecided as to whether to get an annuity to finally take the plunge.”

Top tips from getting the most from an annuity

Shop around

Britons are encouraged to shop around. There are several providers in the market and they all price differently so if they just accept the first quote then someone may be missing out.

There are several different types of annuities and several different providers so it’s worth doing a comparison on an annuity search engine to make people are getting the best deal.

Consider your circumstances

Morrisey said: "When you are faced with a list of quotes, it’s tempting to just take the one offering the highest income. However, it’s a decision you or your loved ones may come to regret.

"For instance, single life annuities offer higher incomes than joint life ones but the joint life one will offer an income to your spouse should you die first. If you opt for the single life version, then your partner could be left with nothing if you die before them."

Give all your health details

The expert explained people may feel hesitant about disclosing information about how much they weigh, or whether they smoke or drink but when it comes to annuities, the more details people can give about their health and lifestyle the better as it can result in a higher rate of income that they benefit from for the rest of your life.

Consider the impact of inflation

Morrisey continued: "You could be retired for 20 years or more and if you opt for a level annuity at outset then you might find its purchasing power nibbled away by inflation over time. Inflation-linked annuities offer an income that grows over time and could be worth considering. However, you will have to accept a lower starting income.

"The latest data from the HL annuity search engine shows a 65-year-old can get up to £5,177 per year from an annuity that grows 3 per cent per year. This compares to the £7,217 someone with a level annuity can currently get.

"That income will grow but it could take you a decade for it to grow to match what you would have got at outset from a level annuity, and it will be many more years again before the total amount of income catches up."

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