Pension options explained

Published 29th January 2024

Planning for your retirement involves making decisions about your pension that can have a big impact on your future. There are different things you can do with your pension funds, and you should choose the best one for you. To help you navigate through the options available, we've put together a straightforward guide to pension choices.

More than half (57%) of all those surveyed for our Get Britain Pension Ready campaign said planning for retirement feels like navigating a complex minefield due to lack of knowledge. 

1. Buy a lifetime annuity

What is it?
A lifetime annuity is a product you can buy using some, or all, of your pension fund to provide you with a guaranteed income for life.


  • Your income won’t change (unless you select for it to increase in line with inflation).
  • Flexibility on how it’s paid (monthly, quarterly, six monthly or yearly).
  • Not affected by market fluctuations.
  • Offers peace of mind knowing your money will never run out.
  • You can choose for your income to increase in line with inflation.
  • You can still choose to take 25% of your pension fund as a tax-free lump sum.
  • You can add death benefits to pass on some money to your beneficiaries.


  • Income won’t rise in line with inflation, unless you select for it to do so.
  • You can't cancel it or change what you receive once you've bought it. Higher incomes may be available through other methods.

Compare lifetime annuities with Annuity Ready
If you’d like to see how much income you could get from a lifetime annuity, all you need to do is complete our online form. We can help you compare guaranteed quotes from all providers in the annuity open market.

“A lifetime annuity is just one of the retirement options available. It provides a guaranteed income for life."

Sarah Lloyd, Commercial Director at Annuity Ready

2. Pension drawdown

What is it?
With drawdown, you leave your pension fund invested while taking an income.


  • Flexibility in managing your income as you can control how much you take out and when.
  • Potential for investment growth.
  • You can still take up to 25% of your pension as a tax-free lump sum.
  • You can pass remaining funds to your beneficiaries.


  • Income isn't guaranteed and can change based on investment performance. The amount can go down as well as up.
  • You could run out of money.
  • The responsibility of managing investments falls on you.

3. Fixed term retirement plan

What is it?
A fixed term retirement plan provides you with a regular income for a set period, typically five or ten years. These plans are sometimes called a fixed term annuity as well.


  • Guaranteed income for a fixed period.
  • Flexibility to reassess your situation at the end of the fixed term when rates may have improved.
  • Option to add a death benefit for a partner or spouse.


  • Income levels are fixed and may not increase with inflation, unless you select for it to do so.
  • There is a risk rates could be lower when you reach the end of your fixed term.
  • The final income options at the end of the term can be limited. Also, the more income you choose to take, the less you'll get at the end of the term.

4. Cash out retirement plan

What is it?
This option lets you take a lump sum of up to 25% of your pension fund tax-free. You can then use the rest to buy a regular fixed income over a period of time.


  • Access to a 25% cash lump sum.
  • Offers a more tax efficient way to take cash from your pension fund rather than taking it all in one go.
  • Income is guaranteed and not affected by investment performance.
  • Gives you the certainty of knowing how much you'll receive.


  • Payments will be taxed as income, which could affect any benefits you may claim.
  • The rest of your fund isn't invested, so the amount you'll get is set and won't increase (or decrease).
  • Lasts for a set time, which may not be for the rest of your life.
  • Unlike a fixed term retirement plan, you won't have a lump sum at the end.

5. Combined options

What is it?
You can mix and match different pension options based on your needs. For example, you might choose to take a tax-free lump sum and use the remaining funds for drawdown.


  • Tailored approach to meet your specific financial goals.
  • Flexibility to adapt to changing circumstances.
  • You can do them one after another, or do them at the same time, based on what you need.


  • Requires careful management.
  • The need for ongoing monitoring of your pension strategy.

6. Cash in your pension fund/tax-free lump sum

What is it?
This involves taking the entire pension pot as one lump sum. Typically, the first 25% of your fund will be tax-free, with the remaining 75% taxed as earnings. If you’re considering this option, you may want to contact Pension Wise for guidance first.


  • Access to a 25% tax-free lump sum.
  • You can decide how to use the remaining funds in your pension.


  • You won’t get a guaranteed regular income.
  • You may run out of money in retirement.
  • Potential tax implications on the remaining funds. You'll get 25% tax-free, but you could be faced with a big tax bill on the rest.

7. Leave your pension where it is

What is it?
If you're not ready to make a decision, you can leave your pension fund where it is. Your money remains invested.


  • Allows for more time to decide on the best course of action for you.
  • Potential for continued investment growth.
  • By waiting, you may end up with more money over a shorter period of time when you eventually do something with it.
  • You can make choices about your retirement options at a later date.


  • Your pension remains subject to market fluctuations and could possibly go down.

Each pension option comes with its own set of advantages and considerations. It's really important to assess your individual circumstances and financial goals. Whatever option you think is best for you, it may be a good idea to get advice from a specialist.

You can search for a financial adviser near you at MoneyHelper. If you’re aged 50 or over, you are also entitled to a free pension guidance appointment from Pension Wise.