What are my pension options at retirement?

Last updated: 4 May 2022   By Dr Lucy Brown, Editor

Choosing the right pension options can help you enjoy the lifestyle you want once you retire from work.

Thanks to reforms brought in from April 2015, UK pension holders have more options than they used to when it comes to their pensions.

A free pension advice service operated by the Government called Pension Wise can advise those aged 55 or over about their options.

However, it's important for anyone considering their pension options to look at the choices on offer and beware of scammers.

pension looking
Credit: Andrii Yalanskyi/Shutterstock.com

Pension options at retirement

The options a defined contribution pension holder has at retirement are more varied now than they were a decade ago.

Thanks to pension freedoms introduced in 2015, people can choose from several options:

  • Annuities
  • Pension drawdown
  • Multiple lump sums
  • Withdraw one lump sum

These extra pension choices mean that people have flexibility to choose the right option for them, although it's important to get financial advice to understand the options available and what they mean.

We've got more detail on that below, but first let's look at these options in more detail.


An annuity can be purchased with all or some of an individual's pension pot. This annuity will either provide income for life or for a set number of years.

Essentially, an annuity allows a pension holder to swap their pension pot for a guaranteed regular income.

There are various types of annuities available including:

  • Lifetime annuity - This provides a guaranteed income for the rest of an individual's life and is a good option for risk-adverse pension holders who are worried about the money running out.
  • Fixed-term annuity - This provides a guaranteed income for a set period of time, anywhere between one and 40 years while the money is invested. At the end of the term, holders will get a maturity amount (minus the income already received) that could be used to buy another annuity or offer a flexible retirement income.
  • Enhanced annuity - If a pension holder has been diagnosed with an illness or has a health issue that could shorten life expectancy, they may be able to access a higher retirement income through an enhanced annuity. This will provide an annuity based on personalised life expectancy.
  • Investment-linked annuity - This is a form of lifetime annuity that offers a guaranteed income with one part of the annuity while another is invested and pays any returns out in extra income. The investment portion of the annuity is based on market performance.
  • Escalating annuity - This type of annuity will pay out an increasing amount each year and is usually pegged to inflation to ensure a steady income.

These options all have benefits and drawbacks, plus there are others we haven't discussed that might be appropriate for people in specific financial circumstances.

If you're going to go down the annuity route, take financial advice to understand which type of annuity is best for you and what the pitfalls are.

While shopping around is generally encouraged for annuities, if a customer opts for a Guaranteed Annuity Rate and this is offered by their existing pension provider, it is often going to be very competitive.

Annuity rates are calculated in percentages, so an annuity rate of 5% on a pension pot of £200,000 would provide an annual income of £10,000.

Pension holders can choose to take up to 25% of their pension pot as tax-free cash while an annuity is purchased with the remainder of the pot.

Pension drawdown

Pension drawdown is also known as flexible retirement income or flexi-access drawdown. It allows holders to keep the majority of their pension savings invested while drawing an income from it.

As with an annuity, individuals opting for pension drawdown can choose to take up to 25% of their pot as a cash-free lump sum. Then the remainder of the pot is invested.

Bear in mind that the value of the pot could decrease because it's based on market performance. Equally, the pot could rise in value.

While drawdown is a good option for those who want to keep their pension invested during their retirement, it might not be the best option for those who prefer stability and would prefer a guaranteed and reliable income each year.

Not all pension providers offer drawdown, so comparing different options and taking advice is vital to ensure you're getting the right option for your retirement.

Multiple lump sums

Pension holders can choose to take a number of lump sums out of their pension, with each lump including a 25% tax-free amount while the rest is categorised as taxable income.

Under this type of pension option, the rest of the pension pot remains invested and continues to either rise in value or fall depending on the market.

Withdrawing lump sums in this way will not provide a regular retirement income and so there is a danger of running out of money.

One lump sum

A pension can be entirely cashed in at retirement age, meaning an individual takes a lump sum of their entire pension pot. 25% of this is tax-free while the remainder of the pot is subject to tax.

There are some crucial things to consider when looking at withdrawing the entire pot:

  • The money is subject to taxation
  • It may affect eligibility for means-tested benefits
  • There will be nothing in the pension pot to pass on to dependants

For some people, taking a lump sum can help clear debts and provide security in other ways, but it's important to remember that there will be no monthly income and the holder may be mainly reliant on the State Pension for day-to-day living if the pension pot is withdrawn and spent.

Mix of options

Some people might prefer a mix of options if they have multiple pension pots.

For example, someone with a workplace pension from one employer and a personal pension they built up separately when they left that employment could choose to do two different things with those pension pots.

This could be a consideration if, for example, you want to ensure there is enough money around to pay for care in old age or help family members with expenses or luxuries.

As we've already discussed, it's important to understand what the implications and benefits of any pension option will be, so be sure to consult a financial planner other or guidance from another reputable source.

If you think you might have pension pots that you have lost track of, read this guide about tracking down lost pensions.

Issues with pension options

The freedom to choose what to do with our pension pots has led to more people choosing options that are right for them rather than being forced into an annuity or drawdown policy.

However, these changes do mean there is more to think about and more that could potentially go wrong. Here are some examples:

  • Not making the most of tax savings on pension pots or withdrawing a lump sum that is taxable and not having enough to cover expenditure
  • High fees for making withdrawals or limited number of withdrawals
  • Pension withdrawals affecting benefit entitlements
  • Lack of flexibility once an annuity is purchased
  • Lack of guaranteed income on some pension plans

So, once again, it's important to fully understand the implications of your pension decisions and the Government introduced a service in 2015 to help with this: Pension Wise.

Pension Wise

The Pension Wise service was launched around the same time the Government introduced their pension freedoms in 2015.

It's designed to help those approaching retirement understand their options and, although it now comes under the MoneyHelper branding, the mission statement remains the same.

Pension Wise offers free local or phone appointments to people who are:

  • Aged 50 or over
  • Have a workplace or personal pension
  • Looking for help to make sense of their options

The advice from Pension Wise is free and will discuss the different factors those approaching retirement need to consider before making their choices.

Read more about Pension Wise on their website or call 0800 138 3944 to book an appointment.

There is a political push to make Pension Wise appointments automatic, so that everyone will benefit rather than it being a service that pension holders need to seek out themselves as they approach retirement.

A report published by the House of Commons Work and Pension Committee in January 2022 suggested there was no clear barrier to making these appointments automatic and they labelled Pension-Wise as a 'well-regarded but under-utilised service'.

So, it could be that we move towards more automatic advice in the future but, for now, people will have to contact Pension Wise directly to discuss their options.

Pension freedoms

Until April 2015, those approaching retirement had two options: take a lump-sum of up to 25% of their pension and spend the rest either on an annuity or as a drawdown pension.

The rule change gave people more freedom and they could take their money as a lump sum, several lump sums, keep the money invested or take the traditional options if they preferred.

At the same, the Financial Conduct Authority (FCA) introduced a requirement for pension firms to offer appropriate risk warnings when they access their pension savings to help avoid them making inappropriate choices. Pension holders should also be signposted towards the Pension Wise service.

Customers who had already purchased a pension annuity were given the right to access the same pension freedoms from April 2017.

Pension scams

Yet pension freedoms have also increased the danger of pension scams for many people approaching retirement.

One common ruse is for a scammer to offer a free pension review online that might then lead to a hard-sell for a fraudulent scheme or investment opportunity.

The FCA estimated £2.2 million had been lost to pension scammers in just a five-month period between January and May 2021, although they believed the total was higher due to people's reluctance to admit they had been scammed or because they didn't yet realise the money had gone.

Research from the FCA found that 36% of people were unable to recognise time-limited offers as the sign of a scam and only 28% knew that a free pension review was likely a scam.

They listed five warning signs pension holders should watch out for when dealing with their pension options:

  1. Being offered a free pension review with no warning
  2. Being offered guaranteed higher returns
  3. Being offered help to release cash from a pension when you're under 55
  4. High-pressure sales tactics such as sending couriers with documents to be signed or time-limited offers
  5. Unusual investments that are unregulated and/or high risk

It's clear that many people would struggle to ensure they were not being targeted in a scam and so it's crucial to take free advice from Pension Wise or a paid financial advisor before making any decisions.

Genuine opportunities won't disappear that quickly and there are plenty of options for pension holders to consider.

Find out more about fraud and how likely it is.

Summary: Consider the options

Pensions are a crucial component of financial planning in the UK and yet many of us remain confused about our options.

Saving for retirement has been a political talking point for many years, making headlines for the lack of employees signing up to workplace pensions in 2013 through to the current discussions about whether Pension Wise guidance should be automatic for those approaching pensionable age.

The idea of a pension is often linked with the idea of saving more generally, and we've seen research that suggests the culture of saving in the UK isn't strong enough and that so-called 'zombie' savings accounts were serving savers poorly.

Retirement ages - and, indeed, the desire to retire early - are shifting, so it's more important than ever for pension holders to decide what age is suitable for them to retire and to consider all their options.

Finally, it's worth reiterating that making the right choice about your pension options can help secure a comfortable life in retirement and avoid the difficulties of dealing with debt as an older person.


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