Retirees’ Guide: Making The Most of Your Retirement Income Options

April 2024 will see the UK’s State Pension increase by around 8%. That means retirees currently receiving the full ‘new’ State Pension will see an increase of £17.35 per week to £221.20 – about £11,500 per year.

It’s another example of the ‘triple lock’ increase from the government, but UK pensioners still receive less from the State than many of their European cousins. According to a report by, as of September 2023, pensioners in Spain could receive over £27,000 per year, and in Belgium, they get up to £32,500.

In a European league table of state pension income, the UK ranked position 16 out of 30 countries. And with the cost of living rising at a rapid rate in recent times, the UK State Pension won’t be enough to allow millions of retirees to enjoy the lifestyle they have been hoping for.

The good news is that successive UK governments have recognized the need to fill the gap between State Pension income and people’s real income needs. This starts with a benefits system that gives the poorest pensioners something to fall back on

Take Pension Credit, for example. This means-tested benefit can top-up the State Pension, and recipients might be eligible for other benefits such as Attendance Allowance, Carer’s Allowance, Housing Benefit, Council Tax Reduction, and so on. It can all add up to the tune of £3,500 per year, on top of the State Pension.

Millions of retirees will of course be turning to extra income from their own private or personal pension, rather than government support.

As retirement approaches, the pension savings you’ve diligently accumulated become a valuable asset awaiting optimization. Individuals on the brink of retirement must understand the myriad of choices available to convert pension savings into a sustainable income.

In the UK, the available options are primarily influenced by the type of pension scheme in which your savings are held. Traditionally, pension schemes used to fall under the ‘defined benefits’ (DB) category, commonly known as ‘final salary’ or ‘average salary’ pensions.

If you are in a DB scheme, you can typically expect to receive a guaranteed income for life. This will be based on a percentage of the salary you receive when you leave that employment or your average salary during your employment.

These schemes have largely been phased out in recent decades, particularly in the private sector, due to funding challenges faced by employers.

For most UK retirees nowadays, the reality is that at least some of their pension savings are in a ‘defined contribution’ (DC) scheme, also known as a ‘money purchase’ pension. This trend will grow and grow, thanks to the government’s introduction of automatic enrolment into such schemes in October 2016.

Unlike DB schemes, members of DC schemes accumulate a fund or pension pot, allowing individuals to choose how to generate income.

It’s the size of the fund that will ultimately determine how much income you can enjoy. These funds can typically be accessed from age 55, although delaying the decision may result in higher income payments.

So how can you turn your DC pension pot into income?

For those seeking a risk-free option, an annuity can be a suitable choice.

An annuity transforms pension savings into a guaranteed income for life or a fixed term. While this provides stability and peace of mind that poor investment performance won’t impact your pension income, you won’t benefit from fund growth if the stock market performs well.

To explore this option, help is at hand. Start by using an online annuity calculator to estimate how much income you could achieve with an annuity. You can also consult with annuity brokers or financial advisers for personal guidance or advice.

Alternatively, retirees willing to take some degree of investment risks during retirement, and to enjoy more flexibility than an annuity typically allows, might consider flexi-access drawdown.

Here, pension savings remain invested, offering potential growth but exposing them to market fluctuations. You also have the flexibility to make withdrawals as needed, providing you with greater control over your finances than an annuity.

But you don’t have to make a black-and-white decision between an annuity or drawdown. You can create a personalized retirement income plan by blending these options. It is essential to carefully weigh the pros and cons, perhaps seeking advice or guidance on tax implications.

Your goal is to aim for the right balance of income level, flexibility, stability, and investment risk based on your individual needs.

If additional income is needed beyond personal pensions and the State Pension, various options are available. With interest rates rising in recent years, UK savers are getting more from their money than has been the case for some time.

As an extra incentive to save, the first £1,000 of interest earned on savings each year is typically tax-free.

However, the reality for some retirees is being ‘asset rich, cash poor’: millions of people have almost no savings at all, but they do own their own homes. In cases like this, options exist to convert property equity into much-needed cash.

Downsizing to a smaller or more affordable property is one approach, that allows individuals to convert property value into tangible funds.

Equity release is another avenue where retirees can leverage the equity in their property. It’s a financial option for homeowners aged 55+ to unlock the value tied up in their property without having to sell or move.

Through this arrangement, individuals can access a portion of their home’s equity as a lump sum or in installments. There are no mandatory repayments as the money plus interest is typically paid back through the sale of your home only when you pass away or go into long-term care.

This can be a useful solution, but it’s essential to carefully consider the potential long-term implications and costs.

As a starting point, use an equity release calculator to help determine how much cash can be released. Professional advice is also essential, since it’s ultimately an expensive option, although it offers new possibilities for retirees seeking additional financial flexibility in retirement.

To sum up, then, many retirees do have the potential to add to their State Pension income. You must take stock of your situation and options as you approach retirement to make the right choices for the best outcome.

IMPORTANT: This information does not constitute financial advice. Please seek professional advice or guidance before making important decisions about your retirement income.