Before 2015, some people with a defined contribution pension were forced to use their pension to buy an annuity (a secure lifetime income) when they retired. Then came the Pension Freedoms legislation and fast forward to today, the retirement landscape is very different.
If you have a defined contribution scheme like a Self-Invested Personal Pension (SIPP), you can now take your pension flexibly while keeping it invested in the stock market.
Here are some of the most popular retirement options, and how these have evolved over the years.
This article isn’t personal advice. Pension and tax rules can change, and any benefits will depend on your circumstances. You can’t usually access money in a pension until you’re 55 (rising to 57 in 2028).
To find out more about the type of pension you hold and your options, you could get guidance from Pension Wise. Or if you’d like personal advice if you’re not sure what to do, ask for financial advice.
The rise of the flexible pension
There’s been a dramatic shift in retirement options since 2015 when pensions freedoms was introduced. We’ve seen a move away from the security of buying an annuity, and a shift towards flexibility.
HMRC reported that more than £72 billion has been withdrawn flexibly from pensions. And the number of people making flexible withdrawals has been steadily rising over the years – just look at the graph below.
Flexible pension withdrawals 2017-2023
Scroll across to see the full chart.
Source: HMRC, September 2023.
In 2022 to 2023, £12.9 billion in taxable payments was withdrawn from pensions flexibly. This has increased from £11.2 billion in 2021 to 2022 and £9.3 billion in 2020 to 2021.
Security vs flexibility
By taking a flexible payment through drawdown or lump sums, you have the freedom to withdraw money as and when you need it. Because the rest of your pension can stay invested, your money also still has a chance to grow.
But despite their benefits and a rise in popularity, flexible pension withdrawals don’t come without downsides.
When you give up secure income, there’s always the risk that you could run out of money during retirement. Your income could also fall or stop completely if your investments don’t perform as well as you might’ve hoped.
Remember, investments and any income from them can fall as well as rise in value, so you could get back less than you invest.
More on the benefits and risks
Lots of people choose to combine their retirement options to get the best of both worlds.
For example, part of your pension could be used to secure an annuity which covers your essential bills and living costs. Then you could move the rest of your pension into drawdown to provide a flexible (and hopefully growing) income as and when you need it.
Annuity rates rose and so did their popularity
Annuities provide you with a secure taxable income for life. It doesn’t matter how long you live, or what happens in the stock market.
Although they offer ultimate security for retirees, annuity rates have been at historical lows for years, making them a less attractive choice when compared to other retirement options.
In October 2015, a 65-year-old with a £100,000 pension could get as little as £5,842 a year from an annuity. Today the same sum could get them £7,412. This is a 26% increase, or around £1,570 more, in secure income every year.
Although annuity rates have stayed on an upward trajectory over the past two years, they can vary week to week.
Scroll across to see the full chart.
Source: HL annuity engine. These quotes are based on an average postcode and were run on a single-life basis over 14 October 2021 to 12 October 2023, with a five-year guarantee period, paid monthly in advance.
A rise in annuity rates has led them to popularity again. In fact, our data shows that the number of people getting an annuity quote has grown by 56% over the last year alone. And the number of people buying an annuity has risen by a huge 169%. Remember, annuity quotes are guaranteed for a limited time only and rates change regularly.
Choosing the right retirement option
If you’re thinking about taking money from your pension, it’s important you get the full picture first. Make sure you’re shopping around for the option that’s right for you.
Read our guide to find out more about the benefits and risks of each option.