Guaranteed income is the top retirement priority for 39% of savers, while one in 10 say they need their income to rise with inflation, according to a survey from investment platform Hargreaves Lansdown.
Assuming you are a member of a defined-contribution pension scheme (rather than a defined-benefit scheme), the only way to secure a guaranteed income in retirement is by buying an annuity. Other strategies won’t give you the security of knowing exactly how much retirement income you will receive each month.
That doesn’t mean an annuity is the right (or only) choice for everyone. Flexibility is also key for many savers, with 7% saying they want the ability to take more income as needed – something you can’t do with an annuity.
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1. Consider what type of annuity works for you
If you decide to use some or all of your pension pot to purchase an annuity, there are several you can choose from.
A lifetime annuity pays out a fixed sum on a regular basis until you die, while a fixed-term annuity guarantees you income for a set period – anywhere between one and 40 years.
You can also choose between a level and an escalating annuity. The former pays out the same amount throughout the annuity’s term, while the latter rises each year at a fixed rate. Some opt for an inflation-linked annuity instead, which rises in line with a benchmark like the Retail Prices Index (RPI).
If you are single, you might opt for a single-life annuity, while if you have a partner, you might prefer a joint-life annuity that continues to provide an income to your spouse after you die.
Annuities with these additional features tend to be more expensive than single-life level annuities, but it could be worth it over the long run. A level annuity might give you a higher starting income, but an inflation-linked product could end up paying out more over time if prices start rising rapidly.
“It’s important that you do your due diligence before buying an annuity – once bought, an annuity cannot be unwound so you need to make sure you use an annuity comparison service to see what the different providers have to offer,” Morrissey said.
Whatever option you decide to go for, make sure you shop around to secure the best rate. Annuity rates currently look attractive given that interest rates and bond yields are high, but don’t just opt for your current provider’s offering as a competitor might pay more.
“The most recent data from our annuity comparison service shows a 65-year-old with a £100,000 pension can get up to £7,793 per year with a single-life level annuity with a five-year guarantee,” Morrissey said. “This is close to all-time highs and means that annuities are being used by a wider range of people.”
2. Look at combining an annuity with pension drawdown, if you also need flexibility
While buying an annuity gives you certainty when it comes to your retirement income, there are downsides.
Firstly, 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 around £7,800, if you think you will live for 15 or 20 years after retiring. If you only live for five years, you might feel the money could have been better spent elsewhere.
Pension drawdown doesn’t come with the same risk (although it does have ones of its own), as it 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.
The downside is that drawdown doesn’t give you 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. Of course, the flipside is that keeping the funds invested could allow them to benefit from further investment growth.
With this in mind, retirees are increasingly opting for a combination of the two approaches.
“While most of us want the security of knowing that our income will be maintained at a certain amount, the chances are many of us won’t have saved quite enough to ignore the need for further investment growth,” said Pete Cowell, head of annuities at financial services company Standard Life.
“The good news is that there is now increasing recognition around how using a combination of different solutions, can often better meet people’s needs.”
3. 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% for those on higher incomes, according to figures cited by the Institute for Fiscal Studies.
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 £13,400 per year for a single person, and £21,600 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.
It is worth pointing out that Pension UK’s figures do not include housing costs, which could be considerable if you are still renting or repaying a mortgage in retirement. These basic retirement figures also assume you do not run a car and only holiday once a year in the UK.
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.
If you think you are unlikely to hit 35 qualifying years of NICs by the time you retire, there are steps you can take to boost your state pension. For example, you may be able to claim or purchase NI credits to fill in gaps in your record.
The exact cost depends on the year you are filling, but a year’s worth of Class 3 NICs currently costs £923 (2025/26). Buying one year’s worth of credits entitles you to 1/35th more of the full state pension amount – currently equivalent to £342 extra a year.
This means you should make your money back, provided you survive for at least three years after reaching state pension age. Just read up on some important details before making a decision, as there are some groups it doesn’t make sense for.
4. 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. Although most of these do not offer a guaranteed income (fixed-rate savings bonds are the exception, provided they are covered by the Financial Services Compensation Scheme), they can act as a useful supplement to other income streams.
Generally speaking, it doesn’t make sense for savers to prioritise these over their pension contributions during the accumulation stage (i.e. when you are paying into your pot), 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 does not give you this option, but an ISA does.
Income funds and dividend-paying equities are popular with some retirees. They do not offer guaranteed income, as any payments depend on their investment performance, but some funds have demonstrated a strong track record when it comes to dividend payments.
The AIC’s dividend heroes are one example. All of the trusts in the list have consistently increased their dividends for 20 or more years in a row. The top 10 trusts in the list have managed 50 years or more.
Income funds might also appeal to you if you are worried about inflation. “They can use a combination of growth, bond yields and dividends to help investors stay one step ahead,” said Joe Hill, senior investment analyst at Hargreaves Lansdown.
Those with a higher risk tolerance might be interested in equity income funds which offer the potential for capital growth as well as income, while those who want something less volatile might prefer a bond fund or even a monthly interest savings bond.
The top monthly interest savings bonds currently pay more than 4% AER, according to money comparison website Moneyfacts.
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