Retirement income strategies

With annuity rates currently over 7% (2025) and flexible drawdown more popular than ever, getting the right mix for you can make a big difference. This guide explains the pros and cons of each withdrawal option and how to build a retirement income plan that suits you.

What are your retirement income options?

There’s no one-size-fits-all answer when it comes to finding the right retirement income strategy. It depends on your lifestyle, health, risk appetite and goals. Here’s a table of the main options, their key features and what you might be taxed.

*Tax treatment depends on individual circumstances and may be subject to change in the future.

Annuities – a guaranteed income for life

An annuity is a financial product you buy with your pension pot in exchange for a regular income for the rest of your life (or a set period of time). Once set up, it provides long-term financial certainty and predictability, but less freedom to adapt. You can choose to use all your pension pot to buy an annuity, or just use a portion of it.

In July 2025, a healthy 65-year-old can get around £6,120 per year from a £100,000 pot using a single-life, level annuity. Adding extras like joint life cover or inflation protection means starting with a little less income but gaining extra peace of mind in return.

Advantages of taking an annuity

An annuity removes market risk entirely. No matter how the stock market or economy performs, your income stays the same, providing a sense of security in retirement.

Other potential benefits include:

• Inflation protection – optional features help your income rise in line with living costs.
• Better value if you live longer – the longer you live, the more you receive.
• Boosted income for some health conditions – if your health isn’t perfect, you might qualify for a higher rate.

Potential downsides of taking an annuity

With annuities, there are also a few limitations to consider:

• The rates are set in stone – once you’ve bought an annuity, it’s usually a one-way decision.
• Less flexibility – you won’t be able to dip back into your pot or change course later on.
• Lower starting income with inflation protection – annuities that rise with inflation typically start smaller and take time to catch up.
• Limited control – if your plans shift, such as wanting to gift money or cover unexpected care costs, you may have fewer options.

How to shop around for annuities

Annuity rates can vary a lot between providers, sometimes by over 15%. Over the course of your retirement, this could add up to thousands of pounds in extra income - so it’s well worth comparing your options.

PensionBee customers can ask for a personalised annuity quote from Legal & General, one of the UK’s biggest annuity providers.

Pension drawdown - flexible but not without risk

Flexi-access drawdown lets you keep your pension invested while taking money out as and when you need it. It’s become an increasingly popular choice for retirees who want more control over how they use their pot.

From age 55 (rising to 57 in 2028), you can usually take up to 25% of your pension tax-free, with the rest left invested. The remaining 75% will be taxed as income. You then decide how much income to take, and when.

Advantages of pension drawdown

One of the biggest benefits of drawdown is its adaptability. You can shape your income around your plans, adjust withdrawals to suit your tax situation and respond to lifestyle and personal changes over time.

Other benefits include:

• Flexibility when you need it – draw what you need, when you need it.
• Room to grow – your pension stays invested, giving it the chance to grow (thanks to potential investment growth and compound interest) even after you start drawing an income.
• Easier to pass on – anything left in your pot can usually go to your loved ones free of *Inheritance Tax (IHT). If you die before age 75, your beneficiaries have two years to claim any death benefits held within a pension, after which point Income Tax may be charged. If you pass away after the age of 75, they’ll be taxed at their usual Income Tax rate.

*Pensions are currently considered to sit outside your estate, which means that when you die your beneficiaries can access your retirement savings without having to pay Inheritance Tax (IHT). However, this position is set to change from April 2027 - more on this below.

Potential downsides of pension drawdown

Drawdown isn’t without risk, especially as your money stays invested and can fluctuate with the markets.

Here are some key risks to consider:

• Market risk - your pot is exposed to market volatility.
• Overspending - withdrawing too much too soon can leave you short later on.
• Sequence of returns risk - withdrawing during a market dip can lock in losses and shorten your pot’s lifespan.
• Tax risk - large or irregular withdrawals can increase your Income Tax bill or push you into a higher tax bracket.

How can I work out how much to withdraw?

When you’re planning pension withdrawals, it’s important to think about how long your money needs to last. Many financial advisers recommend an *annual withdrawal rate of 4% to help your money last throughout your retirement.

As an example, if you have a pension pot of £200,000, drawing 4% a year could give you £8,000 annually. The exact amount depends on investment returns, inflation and how long you expect your retirement to last.

You can use the PensionBee Pension Calculator to see how long your current pot could last. Adjust the toggles to change your desired retirement age, current pot amount and see how contributions can impact its overall value over time.

*The 4% withdrawal rule assumes your pension savings continue to stay invested once you retire.

Withdrawing from your pension and the Money Purchase Annual Allowance (MPAA)

Once you start taking money out of your pension as a flexible income from the age of 55 or above (57 from 2028), the money purchase annual allowance (MPAA) is triggered. The MPAA restricts your pension contributions that are eligible for tax relief (also known as the annual allowance) to just £10,000 (2025/26).

The MPAA applies when you:

• move your pension into flexi-access drawdown and begin drawing an income;

• withdraw your entire pension pot as a lump sum, either in one or ad-hoc instalments;

• purchase a flexible annuity; or

• exceed the withdrawal limit for a ‘capped drawdown‘ plan.

You’ll usually be exempt from the MPAA pension limits if you:

• only withdraw your 25% tax-free entitlement as a lump sum or in installments;

• use your pension to purchase a lifetime annuity; or

• cash in a small pension pot valued at less than *£10,000 (providing certain criteria are met).

UFPLS – ad-hoc lump sums without setting up drawdown

UFPLS stands for ‘uncrystallised funds pension lump sum‘. It’s a way of taking money from your pension pot without starting pension drawdown. Instead of setting up an income stream, you simply withdraw money whenever you need it, with each payment split into 25% tax-free and 75% taxed as income.

It’s a straightforward, flexible option that suits some retirement situations better than others.

More about the MPAA.

Who is UFPLS for?

UFPLS can be particularly useful if you:

• Have a smaller pension pot
• Only need occasional access to your savings
• Want to fund one-off expenses like paying off debt, helping family, or making home improvements
• Aren’t ready to commit to a full income strategy

Because UFPLS doesn’t require you to move into drawdown, it can be a simple way to access your pension without taking too much too soon.

UFPLS considerations

While UFPLS gives you plenty of freedom over your withdrawals, there are a few important points to consider, especially around tax.

• Only part of each payment is tax-free – 25% of each UFPLS withdrawal is tax-free. The remaining 75% is taxed as income at your usual rate.

• Large withdrawals could increase your tax bill – taking big lump sums, or several smaller ones in the same tax year, could push you into a higher tax band.

• Timing matters – spacing out withdrawals across tax years can help lower your overall tax burden.

• Keep an eye on your total income – UFPLS payments are counted alongside other income, so it’s worth monitoring how they all add up.

How to use a mix of withdrawal strategies

Many people combine different retirement income strategies to get the best of both worlds, using a mix of certainty and choice to meet both their essential needs and lifestyle goals.

This is often called a hybrid approach (sometimes known as ‘bucketing’ or ‘layering’), where your pension is divided into separate parts, each with a clear role.

• Secure bucket – used to buy a guaranteed income product, like an annuity, to cover essentials such as rent, utilities or food.

• Flexible bucket – left in your pension to either take as pension drawdown or UFPLS to fund discretionary spending, like holidays, hobbies or gifts.

• Cash bucket – held in easy-access savings to cover two-three years of living costs, helping you avoid dipping into investments during market downturns.

This kind of approach can help you balance risk and growth, while giving you the freedom to adapt as life changes without being locked in.

Learn more with our simple retirement planning tools. Our Pension Calculator can help you work out how much income your pension could give you, understand your tax benefits and feel more confident about when and how to start taking money out.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 21-10-2025