Turning your pension into income: drawdown, annuities and blends

Building a pension pot is only half the journey. The other half - turning that pot into a reliable income that lasts the rest of your life - is where some of the most important, and least reversible, decisions are made. Here are the main options and how they compare.

Most people can take up to a quarter of their pension as a tax-free lump sum, subject to an overall cap of around £268,275 unless a protection applies. You do not have to take it all at once, and how and when you take it interacts with the choices below. It is tempting to grab the maximum immediately, but phasing it can sometimes be more efficient, so it is worth thinking about rather than defaulting.

With income drawdown, your pot stays invested and you draw money from it as you need. The appeal is flexibility and control: you decide how much to take and when, you can vary it year to year, and anything left can pass to your beneficiaries. The trade-off is that your income is not guaranteed - it depends on investment performance and on drawing at a sustainable rate. Take too much too soon, especially if markets fall early in retirement, and the pot can deplete faster than expected.

That last risk - poor returns in the early years doing lasting damage - is called sequencing risk, and managing it is central to running drawdown well.

An annuity converts some or all of your pot into a guaranteed income for life, paid by an insurer. The attraction is certainty: whatever markets do and however long you live, the income keeps coming. You can add features such as inflation-linking or provision for a surviving partner. The trade-off is that a conventional annuity is usually irreversible and, in its simplest form, does not leave a pot for your family. Annuity rates change with market conditions and can also vary according to age, health and the benefits selected, so the income available should be checked at the point of decision.

These are not either-or choices. A popular approach is to use an annuity (alongside the State Pension) to cover your essential, non-negotiable spending with guaranteed income, and to keep the rest in drawdown for flexibility and growth. That way your basic security is locked in, while you retain control over the discretionary part. The right blend depends on how much guaranteed income you already have, your attitude to risk, and how much you want to leave behind.

Beyond the tax-free cash, pension income is taxable like other income. Drawing large amounts in a single year can push you into a higher tax band, so the timing of withdrawals matters. And with the personal allowance frozen at £12,570 until at least April 2031 while the State Pension keeps rising, more retirees are finding themselves paying tax on modest incomes. Coordinating withdrawals across the year and across different pots may improve tax efficiency.

We design a withdrawal strategy around your real spending, blend guaranteed and flexible income to suit you, and review it as life and markets shift.