Retirement income

Turning your pension pot into a retirement income

  • The different options for getting a retirement income
  • Which products you might need to buy
  • The difference between an annuity and income drawdown

You've spent 30 to 40 years saving into a pension, and now that you're approaching your retirement, you need to turn it into an income that may need to last for the next two decades or even longer. So, where do you start?

How you convert your pension savings into a regular income depends on the type of pension you have and how much you have saved. The bigger the pension pot, the more flexibility you have, although there has been greater flexibility for all since April 2015.

The Which? Money Helpline has a team of qualified experts who can help answer your queries on retirement. Sign to up a £1 trial with Which? and speak to one of our experts. 

Final salary pensions

If you have a final salary pension, also known as a defined benefit (DB) pension, you don’t need to worry about buying another product to get an income.

Final salary schemes pay you an annual pension income based on your earnings over the lifetime of your working career. It's often a proportion of your salary, multiplied by the number of years you have been a member of a scheme. This proportion is known as the 'accrual rate', and is often 1/60th or 1/80th of your salary.

So, if you retired on a salary of £40,000 and worked for a company for 30 years, and had a final salary accrual rate of 1/60th, you'd receive an annual pension income of £20,000.

To find out more, read our guide to defined benefit and final salary pension schemes.

Other types of pension scheme

Very few final salary schemes are open to new savers, so many people retiring will have a defined contribution, or money purchase pension scheme. With these, the outcome is not defined, and your savings will grow through investment on the stock markets.

When you retire, it's possible to combine your defined contribution pension savings into one big pot to then use to buy an income. Purchasing an annuity has been the most common way of turning your pension into an income, although this has now changed. 

Since April 2015, you have been able to withdraw as much of the money as you want when you reach 55, although it is taxed as income.


An annuity is a financial product that converts your pension savings into an income. You exchange your savings for an 'annuity rate' which reflects how much income you’ll earn in a year.

For example, if you have £100,000 in your pension pot and you buy an annuity paying 5%, you’ll be buying an annual income of £5,000 for the rest of your life. This could stay the same, or you have the option to link your income to the rate of inflation.

The rate you're offered depends on a number of factors, including your age, health and where you live. It also depends on market conditions at the time, namely the return you can get from government bonds.

You don't have to spend all your savings on one annuity. If you have a number of pots, you could buy multiple annuities over a number of periods. Fewer people are arranging annuities since the 'pension freedoms' came into force.

To find out more, read our expert guide to annuities and the different types.

Income drawdown

If you don't want to buy an annuity, you don't have to. There's another product available called income drawdown or flexi-access drawdown.

This sees your pension savings remain invested in the stock market, and allows you to take a regular income from the plan. This is riskier than an annuity, as you have no certainty of income each year, and you run the risk of running out of money if you take too much income and stock markets fall.

Income drawdown is a complex area and it's important that you seek financial advice before choosing this option.

To find out more, visit our guide to income drawdown.

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Last updated:

April 2016

Updated by:

Paul Davies

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