Security vs flexibility - what’s the most popular retirement option?

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HMRC reported that more than £72 billion has been withdrawn flexibly from pensions.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.

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

In 2022 to 2023, £12.9 billion in taxable payments was withdrawn from pensions flexibly.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.

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.

But thanks to rising interest rates, annuity rates went skyward. In the aftermath of the mini-Budget in 2022, a 65-year-old with a £100,000 pension could get up to £7,586 each year from a single life level annuity with a five-year guarantee.

This is a whopping 52% higher than the £4,979 each year someone in the same position could get back in June 2021. This rate rise has led to them being popular again.

Remember, annuity quotes are guaranteed for a limited time only and rates change regularly.

More on annuities

A look back at annuity rates

The graph below provides a detailed look back at how annuity rates have evolved over the years, highlighting key changes and trends.

Scroll across to see the full chart.

Source: HL annuity index. This index tracks the top rate for a single life, level annuity, paid monthly in advance and guaranteed for 5 years, £100,000 purchase price. Postcode PE29 7HG. Rates up to 21/12/2012 are male and thereafter are unisex.

What you do with your pension is an important decision. You should understand all of your options and know that the option you choose is right for your circumstances. If you’re not sure, you should ask guidance from Pension Wise or advice from a financial adviser.