Building financial security for later life
Retirement no longer has to mean simply buying an annuity and receiving a fixed income for life. Since pension freedoms were introduced, people have had greater control over how and when they access their pension savings.
However, greater choice can complicate retirement planning. If you want the security of knowing that essential bills will be covered, establishing a reliable income strategy should be a key part of your planning.
Annuities offer certainty
An annuity is one of the most straightforward ways to secure a guaranteed retirement income. In exchange for some or all of your pension savings, an insurer pays you a regular income, typically for the rest of your life.
The rate offered depends on factors such as your age, pension size, prevailing interest rates and, in some cases, your health and lifestyle. You can usually take your pension commencement lump sum separately, subject to the relevant tax rules.
Types of annuity
There are several types of annuity to consider. A level annuity pays a fixed income, while an escalating or inflation-linked annuity is designed to increase over time to help protect your spending power.
You may also be able to choose a joint-life annuity, which continues to pay an income to your spouse or partner after your death. These additional protections can provide greater security for your family, but they will generally reduce the initial income.
Don’t overlook your State Pension
The State Pension can provide an important foundation for retirement income. For 2026/27, the full new State Pension is £241.30 per week, equivalent to around £12,548 per year. The amount you receive depends on your National Insurance record. The State Pension age is currently 66 and a number of months, as it gradually rises from age 66 to 67 between April 2026 and April 2028. It may increase to 68 by 2046 or potentially earlier.
Checking your State Pension forecast can help you determine how much guaranteed income you can expect and when it will start. This can then be factored into your wider retirement income strategy.
Drawdown offers flexibility
Pension drawdown lets you keep your pension invested while taking an income as and when required. This can be useful if your spending varies throughout retirement, but unlike an annuity, the income is not guaranteed. Your pension remains exposed to investment markets, so poor performance combined with high withdrawals could increase the risk of your savings running down too quickly.
Withdrawals are generally subject to Income Tax, although you can usually take up to 25% of your pension as tax-free cash, subject to the relevant limits. In England, Wales and Northern Ireland, the standard Personal Allowance for 2026/27 is £12,570, and income is generally taxed at 20%, 40% or 45%, depending on your total taxable income. The Personal Allowance begins to taper once adjusted net income exceeds £100,000.
A blended approach
You do not necessarily have to choose between an annuity and a drawdown. Combining the two can provide a balance between certainty and flexibility.
For example, you could use part of your pension to secure sufficient guaranteed income to cover essential spending, while keeping the remainder invested to fund discretionary spending or cover unexpected costs.
Consider your wider finances
Your pension is only one part of the picture. Savings, investments and rental income may also contribute to your retirement income, but they do not necessarily offer the same guarantees as an annuity or the State Pension.
Tax planning is also important. For 2026/27, the standard pension annual allowance is £60,000, or 100% of earnings, whichever is lower. For high earners, this can be reduced by £1 for every £2 of adjusted income above £260,000, subject to the applicable thresholds and the minimum allowance. The Money Purchase Annual Allowance is £10,000 for those who have flexibly accessed a defined contribution pension.
Get advice before making a decision
Deciding how to turn pension savings into retirement income can affect your financial security for many years. An annuity can provide a guaranteed income for life but is generally irreversible once purchased, making it important to understand the available options before committing.
Drawdown offers greater control but requires careful management of investment risk and withdrawals. Professional financial advice will help you assess the different approaches, consider the tax implications and develop a strategy appropriate to your circumstances and retirement goals.
This article does not constitute tax, legal or financial advice and should not be relied upon as such. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028, unless the plan has a protected pension age). The value of your investments (and any income from them) can go up or down, which would affect the level of pension benefits available. Investments can rise or fall in value, and you may receive back less than you invested.
Annuities are long-term, complex financial instruments that may not be suitable for all investors. The information in this material is for informational purposes only and does not constitute financial advice. All investments carry risk, and annuities are no exception. The performance of an annuity is not guaranteed and can be affected by market conditions and other factors. It is essential to carefully consider your financial situation, investment objectives, and the product’s fees and restrictions before purchasing an annuity.
The tax implications of pension withdrawals will depend on your individual circumstances. Tax thresholds, percentage rates and tax legislation may change in subsequent finance acts.