Rising annuity rates have increased the guaranteed income levels you could potentially get in retirement. So, is buying an annuity the best option and what income could you expect to receive?
If your pension savings pot totalled £250,000, would that be enough for you to live on? The answer to that apparently simple question is complex as it depends on several factors: your age, health, life expectancy, the life you want to lead in retirement, existing debts, property situation, dependents and previous lifestyle, among others.
We cannot consider all these factors here, but what we can do is look at some approaches you can take with a total pension that’s worth £250,000.
For simplicity’s sake, we consider three relatively straightforward options in the flowchart and text below. But, as we explain further down the article, other approaches can also be adopted.
Keep in mind that tax treatment varies by individual and may change over time.
Let us assume that you have accrued a total pension pot of £250,000 in a defined contribution (DC) pension, such as a personal pension or a Self-Invested Personal Pension (SIPP, and you are old enough to draw money from it. In a DC pension, the amount of retirement funds built up depends on how much you and your employer contributed and how these pension investments performed.
At the time of writing, UK legislation generally allows you to withdraw money from your pension once you reach 55 years of age, but this will increase to 57 from April 2028.
With this in mind, we consider three options. These options seem relatively straightforward; there are, though, many factors to consider:
Let us look at these in turn.
Once you have considered the range of available options and have an idea of how much income £250,000 could pay, you might be tempted to leave your money where it is for a while longer.
This leaves your money invested where it has the potential to grow (or fall) in value.
The broad tax rules that apply to pension contributions at the time of writing are shown below.
Now let us consider two of the other options.
Here we consider three ways in which you can do this:
The first 25 percent of your £250,000 pension pot can be withdrawn without having to pay any tax on it. This amounts to £62,500, leaving £187,500, which is taxable. The following is a hypothetical example to give you an idea of how taxes might be applied on the remaining £187,500. This calculation assumes you have no other income for the tax year of withdrawal.
At this income level, you would not be entitled to any personal allowances. You would then pay 20 percent tax on the first £37,700, 40 percent on the next £87,440, and 45 percent on the remaining £62,360, and your total tax bill would be £70,578. Deduct that tax from the £187,500, and then add back the tax-free amount of £62,500, and you are left with £179,422 net of income tax.
IMPORTANT: This is a hypothetical example using the 2025/26 personal tax bands for England and Northern Ireland, these may differ for the devolved nations of Scotland and Wales. The amount of tax you would pay is dependent on your personal circumstances.
Let’s assume a 25 percent/75 percent split for illustrative purposes, as we know the first 25 percent of the pot can be withdrawn as cash tax-free. We then use the rest to buy an annuity, which is a guaranteed income source.
So you could take up to £62,500 tax-free and then use the entire remaining £187,500 to buy an annuity. The income from that annuity is then taxed as earnings.
Finally, you could withdraw the entire pension pot and use 100 percent of it to buy an annuity. There is no tax liability when you buy the annuity, but the money you receive from annuity payments will be subject to tax. What will an annuity pay?
This depends on a range of factors including:
The table below, based on data from the Sharing Pensions website, shows the annual income you can currently expect to receive from a £100,000 lifetime annuity. It assumes the income is paid monthly and that the annuitants have no health issues. The figures have been adjusted for unisex annuity rates on a gender neutral basis. In the case of joint life annuities, the data assumes the annuitants are of the same age and that the income falls by 50 percent on the death of one of the annuitants.
| Age | Single life annuity | Joint life annuity | ||
|---|---|---|---|---|
Level rate with no guarantee | 3% escalation with no guarantee | Level rate plus 50% joint life | 3% escalation plus 50% joint life | |
55 | £6,582 | £4,576 | £6,301 | £4,275 |
60 | £6,954 | £5,004 | £6,667 | £4,713 |
65 | £7,745 | £5,769 | £7,193 | £5,279 |
70 | £8,508 | £6,498 | £7,729 | £6,125 |
75 | £9,779 | £8,056 | £8,788 | £7,279 |
Source: sharingpensions.co.uk, ‘Annuity rates table – standard’, 4 August 2025. Income is gross per year, so is before the deduction of any tax.
The table shows that the annual income from an annuity increases with age, reflecting the shorter time period during which the annuity income will likely be paid. It also demonstrates that the initial annuity rate for an increasing annuity (in this case with 3 percent escalation) is lower than for a level rate annuity. This is because the income from an increasing annuity will rise over time, while the income from a level rate annuity stays the same forever.
The table also reveals that the income from joint life annuities is lower than for comparable single life annuities. This is due to the fact that income will continue to be paid, albeit on a reduced basis, after the death of one of the spouses or civil partners.
To get an idea of what an annuity might pay based on the full £250,000 being used, let’s look at two illustrative examples. Here, we show how annuity rates can differ by region, health and lifestyle through the use of two representative 60 year olds: Annie, a healthy woman living in an affluent area; and Andy, a man with health problems living in one of the UK’s poorer regions. Once again, the figures are on a gender neutral basis.
Annie and Andy both choose an annuity with the following characteristics:
The following quotes and numbers were taken from the moneyhelper.org.uk website in August 2025 and are stated gross of tax. MoneyHelper is part of the Money and Pensions Service (MaPS), a non-profit organisation set up by the UK government. It provides broad guidance but, obviously, cannot allow for the many variations of factors that apply across individual circumstances.
Annie
Annie is a healthy, physically average non-smoking teetotaller, aged 60, living in one of the UK’s most expensive areas. She uses the £250,000 in her pension to purchase an annuity
Annie can expect to receive an income of £940 a month (£11,291 a year).
Andy
Also 60 and single, Andy lives in one of the UK’s poorest areas. Andy is overweight, enjoys around three glasses of wine a day, smokes heavily, has heart problems and high cholesterol.
Andy can expect to receive an income of £1,321 a month (£15,856 a year).
Andy’s health problems, lifestyle and postcode statistically reduce his life expectancy. This is reflected in the higher monthly payments he will receive, compared with Annie, as it is assumed there would probably be fewer of these payments.
In Option 2 we have given three ways to put pensions savings into cash and annuities. But we note that there are many other choices.
This is where you could, for example, potentially set up regular withdrawals from your pension pot.
Let us begin by considering someone who draws down £1,000 every month, and decides to take 25 percent (£250) of that as tax-free income, while the remaining £750 would be taxable. HMRC calls this kind of arrangement ‘uncrystallised funds pension lump sums‘ (UFPLS).
This could be beneficial in two ways. First, by taking smaller amounts, you might stay within a lower tax bracket. Second, it enables you to leave money in investments, which can continue to offer potential growth.
Always remember that stocks can, of course, go down as well as up, so there is no guarantee that your pension pot will grow during this or any other period.
Assuming that your pension pot neither grows nor shrinks during the subsequent months, such a drawdown schedule would give you 250 months of payments. This equates to 20 years and 10 months, taking you up to the age of 80. But, at Schroders Personal Wealth (SPW), we plan for people living to the age of 100.
Moreover, inflation is rarely ever zero or negative and in July 2025 it was 4.2 percent. This means the value of that monthly payment could buy less and less with each passing year.
In addition, many people like to be very active during the first 10 to 15 years of retirement. In this period, you may want to spend more money, take lots of holidays, and make the most of your years of good health. Consequently, you could need more money in your sixties and seventies than in your eighties, when your lifestyle might be slowing down.
Your main concern for your nineties might be to have stability and comfort. You might also want to prepare for the possibility of later life costs in nursing homes or care in your own home. So funding needs could potentially rise again.
We should note, however, that flexi-access drawdown (FAD) offers an alternative to UFPLS. With FAD, you take 25 percent tax-free cash up front, either in full or a bit at a time. Under HMRC rules, for each £1 taken as tax-free cash, £3 goes into a FAD account. The pot in the FAD account remains invested. You can then decide if you want a regular income, or amounts as and when you need them. Tax may then be liable on all withdrawals taken from the FAD account.
The tax pros and cons of these two approaches are complex and you may benefit from financial advice if you’re considering withdrawing money on a piecemeal basis.
Second, you may wish to adopt other, hybrid approaches. So you could, for example, take 50 percent of your pension savings pot to buy an annuity, while keeping the remaining 50 per cent invested as pension pot savings.
Other considerations to bear in mind include:
This is a complex area and you may benefit from seeing a financial adviser who can consider your individual circumstances and recommend appropriate courses of action. At SPW, one of our principles is to have regular reviews with a financial adviser to help ensure your financial plans remain on track to meet your goals.
Any views expressed are our in-house views as at the time of publishing.
Fees and charges apply at Schroders Personal Wealth.
In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.
The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.
The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which is not guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.
There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.
All information correct at the time of publishing.
