Nearly two-fifths of savers choose guaranteed income as their top priority because they want certainty in retirement
Annuities can provide this income, but what other sources of income are there to augment it?
According to a survey by investment platform Hargreaves Lansdown, one in ten respondents say they need their income to increase with inflation, while 39% of savers rank guaranteed income as their top retirement priority.
The only way to guarantee a retirement income, assuming you are a member of a defined-contribution pension plan (as opposed to a defined-benefit plan), is to purchase an annuity. The certainty of knowing your exact monthly retirement income will not be provided by other strategies.
Annuities are not necessarily the only or best option for everyone. For many savers, flexibility is also crucial; according to 7% of respondents, they would prefer to be able to withdraw additional funds as needed, something an annuity cannot provide.
There are many options to choose from, even within the annuity universe. Some products pay out income in different ways, such as inflation-linked options and products that continue to pay your partner an income after your death.
If you want to have a source of income in retirement, we examine your options in more detail.
1. Think about the kind of annuity that suits you
There are various options available to you in the event that you choose to buy an annuity with all or part of your pension fund.
While a fixed-term annuity ensures you income for a predetermined period of time, typically one to forty years, a lifetime annuity pays out a fixed sum on a regular basis until your death.
A level and an escalating annuity are additional options available to you. While the latter increases annually at a set rate, the former pays out the same amount over the course of the annuity. Instead, some choose to invest in an inflation-linked annuity, which increases in tandem with a benchmark such as the Retail Prices Index (RPI).
You may choose a single-life annuity if you are single, or a joint-life annuity if you have a spouse, which will continue to pay your spouse after your death.
In the long term, an annuity with these extra features might be worth the higher cost compared to a single-life level annuity. You may start out with a higher income from a level annuity, but if prices begin to rise quickly, an inflation-linked product may wind up paying out more over time.
"Using an annuity comparison service to see what the various providers have to offer is crucial because once an annuity is purchased, it cannot be unwound, so it's important that you do your due diligence before purchasing one," Morrissey stated.
Make sure to compare prices for the best deal, regardless of the option you choose. Given the high interest rates and bond yields, annuity rates currently appear appealing; however, don't limit yourself to your current provider's offering because a competitor may offer a better deal.
According to the latest data from our annuity comparison service, Morrissey stated that a 65-year-old with a £100,000 pension could receive up to £7,793 annually from a single-life level annuity with a five-year guarantee. This indicates that a broader spectrum of people are using annuities, as it is near all-time highs.
2. If you also require flexibility, consider combining an annuity with pension drawdown
There are drawbacks even though purchasing an annuity guarantees your retirement income.
The first is that no one can predict how long they will live. Using the numbers previously provided by Hargreaves Lansdown, if you anticipate living for 15 or 20 years after retirement, you might be content to exchange a £100,000 pension for an annual income of about 7,800. The money might have been better used elsewhere if you only have five years to live.
Although it has its own risks, pension drawdown doesn't carry the same risks because it gives you the flexibility to access your pension fund whenever you need it. You can leave any unused money as part of your estate to a loved one.
Drawdown has the drawback of providing less certainty. In old age, you may run out of money if you take out too much from your pot too soon or if your investments don't do well. Keeping the money invested, of course, might enable them to take advantage of future investment growth.
In light of this, retirees are choosing to combine the two strategies more and more.
Pete Cowell, head of annuities at financial services firm Standard Life, stated, "Although most of us want the security of knowing that our income will be maintained at a certain amount, the chances are many of us won't have saved quite enough to ignore the need for further investment growth."
"The good news is that more people are realizing how often combining various solutions can better serve people's needs.
3. Remember the state pension, too
The state pension still makes up a significant portion of most people's retirement income, even though it is insufficient to support a comfortable retirement on its own. The Institute for Fiscal Studies cites statistics showing that it makes up about 71 percent of low-income pensioners' income and 23 percent of higher-income pensioners'.
The full new state pension, which is currently 11,973 per year (20252026), should be paid to individuals who have made National Insurance contributions (NICs) for 35 qualifying years.
For comparison, according to data from the trade group Pensions UK, a single person's basic retirement expenses are 13,400 per year, while a couple's costs are 21,600. Accordingly, if both individuals were eligible, the state pension could cover all of a couple's expenses and cover 89% of a single person's basic retirement expenses.
It is important to note that housing costs, which could be significant if you are still renting or making mortgage payments in retirement, are not included in Pension UK's figures. These fundamental retirement statistics also presume that you don't drive and take one UK vacation per year.
Although most people will aim for something a little more comfortable, which will make them more dependent on private pension wealth, it is worthwhile to ensure that you are eligible for the maximum amount of state pension.
There are actions you can take to increase your state pension if you believe you won't reach 35 qualifying years of NICs by the time you retire. To close any gaps in your record, for instance, you might be able to purchase or claim NI credits.
Class 3 NICs currently cost 923 (2025/26), though the exact cost varies depending on the year you are filling. Purchasing a year's worth of credits gives you a 1/35th increase in the total state pension amount, which is currently equivalent to £342 more annually.
That means you should get your money back, if you live for three years or more after you reach state pension age. It doesn't make sense for certain groups, so just read up on some crucial information before choosing.
4. Put additional money into investments to augment your pension income
You can also use wealth that is not in a pension to augment your retirement income.
Examples include monthly income bonds, dividend-paying stocks, and income funds that are all held within an ISA. As long as they are covered by the Financial Services Compensation Scheme, fixed-rate savings bonds are the exception to the rule that most of these do not guarantee income, but they can serve as a helpful addition to other sources of income.
In general, savers should not prioritize these over their pension contributions when they are in the accumulation stage (i.e. e. when making contributions to your pot), since pensions are eligible for substantial tax breaks and employer-provided contributions.
Nonetheless, some groupssuch as high earners and those who wish to have some flexibility in accessing their money before they turn 55will have amassed distinct wealth pots. You have this choice with an ISA, but not with a pension.
Some retirees prefer dividend-paying stocks and income funds. Although they don't guarantee income because payments are contingent on the performance of the investments, certain funds have a solid dividend payment history.
Among them are the dividend heroes of the AIC. For at least two decades, every trust on the list has raised its dividends steadily. At least 50 years have been managed by the top 10 trusts on the list.
If you are concerned about inflation, you may also be drawn to income funds. According to Joe Hill, senior investment analyst at Hargreaves Lansdown, "they can use a combination of growth, bond yields, and dividends to help investors stay one step ahead."
Bond funds or even monthly interest savings bonds may be preferred by those who want something less volatile, while those with a higher risk tolerance may be interested in equity income funds, which offer the possibility of both income and capital growth.
The money comparison website Moneyfacts reports that the top monthly interest savings bonds currently pay more than 4 percent AER.
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