Just 42% of Brits understand their retirement options. What are yours?

You may have spent your career diligently building your retirement savings, but do you have a plan for how you’ll actually access those funds in retirement?

If you’re unsure, you’re not alone. PensionsAge reports that only 42% of UK adults clearly understand their retirement options.

As such, more than half may be at risk of making uninformed decisions that could see them run out of money in retirement or face unnecessary tax bills.

Drawing a sustainable income throughout retirement requires comprehensive planning. Read on to discover your main options and some important factors to consider.

You can generally withdraw 25% of your pension pot tax-free

If you have a defined contribution (DC) pension, you can generally take up to 25% of your pot as a tax-free lump sum, up to the Lump Sum Allowance (LSA) of £268,275 in 2026/27.

You can typically withdraw your lump sum once you reach the normal minimum pension age (NMPA), which is 55 as of 2026 and rising to 57 from April 2028. However, many people don’t take the funds until they retire, as withdrawing sooner could limit the pot’s growth and tax benefits.

You can choose to take your lump sum at any point in your retirement, and you don’t have to take it all at once. You might choose to:

• Draw down the full 25% as a one-off lump sum
• Take smaller, regular amounts with 25% of each withdrawal exempt from Income Tax – known as an Uncrystallised Funds Pension Lump Sum (UFPLS)
• Withdraw your full pension pot, with 25% tax-free and 75% subject to Income Tax.

The most suitable option for you will depend on your needs and retirement goals. You might prefer to take a significant sum upfront to fund large expenses such as home renovations or a once-in-a-lifetime trip, or you could prioritise maintaining a consistent, sustainable income. A financial planner can help you determine your ideal approach.

Pension withdrawals are typically subject to Income Tax

Beyond your tax-free lump sum, pension withdrawals are subject to Income Tax at your marginal rate. This is determined by your level of income in retirement.

All your earnings will usually contribute to your tax band. This could include income sources such as:

• Pension withdrawals
• Interest on savings
• Dividends from investments
• Property income, such as rent
• State Pension payments.

As of 2026/27, the Income Tax thresholds are frozen at the following levels until 2031:

With the State Pension rising to £12,547.60 a year from April 2026, most additional income will be taxable for those claiming the full new State Pension.

As such, it’s important to plan your drawdowns carefully. Taking more than you need could push your income into a higher tax bracket.

To help mitigate your tax bill in retirement, you might consider:

• Only drawing what you need from your pension each year to remain in a lower tax bracket
• Planning your retirement income together with your partner to keep you both from moving into a higher tax bracket
• Drawing from tax-free sources such as your ISAs to supplement taxable income.

A financial planner can help you consider all your options and identify an appropriate strategy for your needs and circumstances.

You might consider using an annuity to secure a guaranteed income

If ensuring you receive a regular, guaranteed income throughout your retirement is a priority, purchasing an annuity could be an option.

Annuities can offer you a regular income for a fixed term or the rest of your lifetime, in exchange for some or all of your pension pot.

The amount of income you receive is typically determined by the rate you secure. Other factors, such as the amount used to purchase the annuity, the term length, and your age and lifestyle, can also impact your income level.

Your income may rise over time, depending on the type of annuity you select. There are three options:

• Level annuity: You receive a fixed income throughout the annuity term. As inflation pushes costs higher, the purchasing power of your income will likely erode over time.
• Escalating annuity: Your income rises each year by a fixed percentage.
• Inflation-linked annuity: Your income rises in line with the Retail Prices Index each year. Some annuities may cap increases at a maximum percentage.

You can also choose between a single-life annuity and, if you’re in a couple, a joint-life annuity. The former will typically stop paying out when you pass away, while the latter may continue paying an income to your partner after you die.

Annuities can offer peace of mind that you will receive a continuous income in retirement, without the worry of running out of money. However, they are not risk-free. For example, if you were to die early in retirement, you could end up exchanging a large sum for a comparatively small amount of income.

A financial planner can evaluate your priorities and needs for retirement and create a plan to help you maintain a sustainable retirement income.

Get in touch

The options for drawing an income in retirement are complex. There’s no one-size-fits-all solution, with the appropriate strategy dependent on your unique goals and circumstances. It’s important to consider all your options and plan your income carefully before making irreversible decisions.

For support with understanding and weighing your options, call 02392 231 448 today to find out what we can do for you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.