You’ve probably spent most of your working life building up a pension pot. But then what?
When ‘pension freedoms’ took effect 11 years ago, it gave people a choice over what they could do with their pot for the first time. That newfound freedom, combined with low interest rates (and therefore gilt yields), led to a drop-off in demand for annuities. But maybe it’s no longer a binary choice between annuities or drawdown. Perhaps a blend of options is appealing?
If you have a defined contribution (DC) pension, have you already decided what to do with it when you reach retirement? We look at the various options you can take when building a regular income in retirement.
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Are annuities coming back into favour?
According to latest data from trade body the Association of British Insurers (ABI), the amount paid into annuities grew by 4% last year to £7.4 billion – the highest level since pension freedoms were announced in 2014.
The ABI data shows that sales over £250,000 increased by 31% and those over £500,000 rose by 54%, bringing up the average value of annuities to £84,000 – the first time it has ever passed £80,000. The data also shows an 8% rise in those over 70 who are looking to buy an annuity, suggesting those with larger pots and in later life are looking to take advantage of rising rates.
Contrast that with figures from the Financial Conduct Authority (FCA). The regulator’s latest retirement income market data for 2024/25 shows both drawdown policies and annuity sales were up on the previous year.
Drawdown saw the biggest year-on-year increase, up by 25.5% in 2024/25 to 349,992. Annuity sales increased by 7.8% to 88,430.
Annuity rates, which illustrate the annual income that a pension pot of £100,000 could generate, have been creeping upwards. And ongoing uncertainty caused by the war in the Middle East will likely lead to persistent inflation, subsequent rate rises and therefore higher gilt (UK government bond) yields. Most annuity providers populate their products using government bonds because they're at the lower end of the risk spectrum. Therefore, we can expect that annuity rates may move higher still.
Latest comparisons from Hargreaves Lansdown show a 65-year old non-smoking man with £100,000 in a level annuity with a five-year guarantee would give an income of £7,915. In September 2025, that same policy gave an annual income of £7,793.
Ed Monk, associate director at investment platform Fidelity Personal Investing, says the demise of many defined benefit (DB) pension schemes and the rental property market proving more difficult to fund people’s retirement are making annuities more attractive.
“Annuities have come back on the agenda for lots of people. For many people, blending [annuities and drawdown] is going to be a sensible option. Increasingly, people don't have sources of guaranteed income, and particularly sources of guaranteed income that rise with inflation. People have fewer final salary pensions, and things like buy-to-let are harder to make work, which may not have been ‘guaranteed’ but certainly fairly reliable at one point. Those options are closing down, so annuities are returning as a viable way to lock in some guaranteed income.”
What type of annuity is right for me?
In the UK there are different types of annuity, the main ones are:
- lifetime, which pays a guaranteed income for the rest of your life, regardless how long you live;
- fixed-term, which pays a guaranteed income for a set period (usually between three and 25 years but it differs between providers), with the remainder of your pot either invested or paid back to you as a lump sum at the end of the term;
- enhanced or impaired life, which pays a higher income if you have a shorter life expectancy. This might be down to pre-existing medical conditions or lifestyle factors, such as being a smoker.
Annuities also tend to be structured around how they pay the income. These might include level (pays the same amount every year), escalating or inflation-linked (rising annually by a fixed amount or in line with inflation, which is based on the Retail Prices Index, or RPI. These are a good idea if you are concerned about the effects of inflation increasing your living costs over time.
A single-life annuity only pays out to you but if you’re married or in a civil partnership, you might want to look at a joint-life policy. These pay out to you, then on your death will continue paying out (either in full or part) to your surviving spouse or dependent. You can name anyone as a beneficiary or ‘co-annuitant’, it doesn’t have to be a spouse or civil partner.
You can also tailor your payout to move in line with the underlying investments, but obviously this is less predictable.
It’s sensible to plan early, do your research and use an annuity comparison table. You’re not obliged to use all of your pot – you can just annuitise some of it. Also you don’t have to take your current pension provider’s rate, you’re entitled (arguably, encouraged) to shop around in what’s known as the ‘open market option’. Be sure to check any policy terms carefully and be aware of any special features or guarantees.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown explains that an annuity has the benefit of giving a guaranteed income for life but you need to consider your decision carefully. Once bought an annuity cannot be unwound so you need to think about the right shape of annuity to meet your needs.
“A level annuity gives the highest income, but it won’t increase over time so its purchasing power could be eroded. An inflation-linked one will rise but the starting income is much lower. You also need to consider if you want to leave something to your spouse or civil partner in which case you would need a joint life annuity rather than a single life one. Again, the income on a joint life annuity will be lower.”
She says drawdown offers more flexibility over how to take your income and keeping it invested also gives your pot the potential to grow further.
But she warns against withdrawing too much or too early. “You need to be careful not to take out too much too soon and plan your withdrawal strategy carefully so you don’t risk running down your pot and leaving yourself struggling later on.”
How could I use a fixed-term annuity?
Fidelity Personal Investing is seeing greater interest in fixed-term annuities, where someone gets an annuity income for a set period, with the remainder paid back to them at the end of that term.
Monk says: “I think that that's going to become increasingly useful for people if they want to retire before state pension age. We know state pension ages are rising, so if you don't want to wait until 67, 68 or even later, then fixed-term annuities could be useful in a plan that gets you from finishing work to state pension age.”
Simon Jackson, financial planner at Smith & Wardle, says it comes down to whether you prioritise income security or flexibility, how you feel about risk and your individual circumstances. But he agrees a fixed-term option can be good for plugging a gap.
“If a client has a shortfall from where they are now to when their state pension comes in, a fixed-term annuity might be good to fill that shortfall.”
When the remainder of the pot is then returned to you, you can use it to invest, look at drawdown or buy another annuity, splitting the pot so it works when you need it.
Could I combine an annuity with pension drawdown, for greater flexibility?
While buying an annuity gives you certainty when it comes to your retirement income, there are downsides.
First, nobody knows how long they will live. To use the figures cited previously by Hargreaves Lansdown, you might be happy to swap a £100,000 pension for an annual income of just under £8,000, if you think you will live for 15 or 20 years after retiring. But if you only live for five years, you might feel the money could have been better spent elsewhere.
Pension drawdown allows you to flexibly access your pension pot as and when you need it. Any unused funds can be left to a loved one as part of your estate.
For many of Smith & Wardle’s clients, flexi-access drawdown is the more popular route.
Jackson adds: “It just doesn’t ‘close the doors’ in the same way an annuity does. I think it does help if someone is advised though, because they’ve got the additional support; someone alongside them to hold their hand if investment markets go down.”
He says it all comes down to whether certainty or flexibility is more important to you. Drawdown doesn’t give as much certainty. If you draw too much from your pot early on or your investments don’t perform well, you could run out of money in old age. But then keeping the funds invested gives them the chance to benefit from further investment growth.
With this in mind, Monk says retirees are increasingly opting for a combination of the two approaches.
Don’t forget about the state pension
The state pension isn’t enough to fund a decent retirement in its own right, but it still forms a core component of most people’s retirement income. It accounts for around 71% of income among low-income pensioners and 23% of those on higher incomes, according to the Institute for Fiscal Studies (IFS).
The full new state pension currently comes to £11,973 per year (2025/26), and those who have 35 qualifying years of National Insurance contributions (NICs) should receive the full amount.
For context, figures from trade association Pensions UK show a basic retirement costs £13,900 per year for a single person, and £22,500 for a couple. This means the state pension could account for 89% of a single person’s basic retirement costs, and cover a couple’s costs completely, assuming both qualified for the full amount.
While most people will strive for something a little more comfortable, leaving them more reliant on private pension wealth, it is worth making sure you qualify for as much state pension as possible.
Supplement your pension income with other investments
Wealth held outside of a pension can also supplement your retirement income. Income funds, dividend-paying equities and monthly income bonds held inside an ISA are just three examples.
Generally speaking, it doesn’t make sense for savers to prioritise these over their pension contributions when they are building up pension savings – sometimes called the accumulation stage), as pensions qualify for generous tax relief and employer contributions on the way in.
However, some groups will have built up separate pots of wealth, including high earners and those who want the flexibility to access some of their money before they turn 55. A pension doesn’t give you this option, but an ISA does.
Income and dividend-paying investments – funds or stocks – are often popular with retirees. Most UK equity income funds generate a yield of between 3% and 5% but these aren’t guaranteed as their returns and income payments will depend on investment performance but some funds have demonstrated a strong track record when it comes to dividend payments.
The Association of Investment Companies’ (AIC) dividend heroes are trusts that have maintained or grown their dividends for 20 years or more, while 10 of them have increased their dividend for more than 50 years.
Annabel Brodie-Smith, communications director at the AIC, says these structures are particularly suitable for retirement income.
The other defining feature that she says supports this argument is that investment trusts can hold back some of their dividends in reserve, allowing a steadier path of income payments.
During the pandemic, for example, 85% of income-producing investment trusts maintained or increased their dividend in 2020, compared with 23% of their open-ended equivalents.
She also says due to their closed-ended nature, trusts often invest in less liquid assets, such as infrastructure or property. Real assets lend themselves well to regular, consistent income streams.
If you want something less volatile, you might prefer a bond fund or even a monthly interest savings bond. The top three monthly interest savings bonds are currently paying between 4.75% and 4.86%, according to Moneyfacts.
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Sam Shaw is a seasoned finance and business journalist, having held several senior roles across the business press throughout her career, including Editor of Financial Times Group's flagship B2B investment title.
She now works as a freelance writer, editor, content producer and presenter, across trade and consumer media, primarily covering finance, fintech and broader business topics.