UK Pension Options For Retirement

Russell Burns

3 mins

UK Pension Options For Retirement

Introducing pension types

There are two types of private pension in the UK: workplace and personal. There’s also a pension that’s provided by the government, called a state pension. And depending on where you’ve worked, you may have all three...

A workplace pension can either be defined contribution or defined benefit.

In a defined contribution pension – also known as a money purchase scheme – your employer (and/or you) put money into your pension pot. When you retire, the size of your pot will depend on how the investments within it have done and the fees paid along the way.

A defined benefit pension scheme, meanwhile, will provide an income in your retirement that’s based on your salary and length of time working with your employer. They’re rarely offered in the private sector but still available to some public sector workers.

Personal pensions work similarly to defined contribution schemes, and typically give you a wider choice of assets to invest in, especially if you have a self-invested personal pension (SIPP).

State pensions are paid by the government when you reach retirement age, currently 66 but set to rise. The amount you receive depends on your tax contributions via National Insurance. You can check how many years' worth of contributions you’ve made and top-up missing years to maximize your future state pension payout.

Pensions are tax-efficient before you retire

The income from your pensions does attract income tax. But before then, there are tax benefits to putting money away for retirement.

Contributions to your pension pot, up to £60,000 per year, receive tax relief: basic rate taxpayers get an automatic 20% top-up from the government on pension contributions (in line with their tax rate). Higher and additional rate taxpayers get that too and can claim more back, in line with their tax brackets.

Using your pension at retirement

At retirement, defined benefit and state pensions provide a guaranteed income for life.

Defined contribution pensions, however, work differently and are more flexible. You can tap into your pension once you’re 55 years old (rising to 57 from April 2028), choosing from one or a combination of these options.

  • Lump sum: Take 25% of the pension pot total as a tax-free lump sum and leave the rest invested.
  • Income drawdown: Make partial withdrawals when needed.
  • Annuity: Use the pension pot to buy an annuity, which provides you with a guaranteed income for life.
  • Liquidate: Take all the money out of the pension pot which, after the first 25%, attracts income tax.

With defined contribution pensions, there’s the risk your pot runs out of money, meaning you’ve always got to keep an eye on both your spending and other sources of potential income.


An annuity gives you a guaranteed income for life which helps provide peace of mind. Annuity rates are heavily influenced by interest rates: in short, higher interest rates mean higher annuity rates, so the recent increase in interest rates has made annuities a more attractive retirement option.

On the flip side, annuities have no flexibility: once you buy one, you can’t change your mind or switch to another provider. And once you pass away, the annuity isn’t passed on to your family. That’s in contrast to defined contribution pensions where an annuity hasn’t been bought: there, money left in your pension pot is passed on.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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