For those approaching retirement, Michael Brown looks at two different options for your pension income

Those aged 55 or over, and those aged 57 or over from 2028, can access their defined contribution pension pots as they please. In other words, any personal or workplace pension contributions you have made during your working lifetime can be used in a variety of ways at these ages.

This is a critical moment for many, or soon to be, retirees. From here they can use this money to purchase different types of retirement plans, two of the most popular being an annuity or pension drawdown.

Below we have briefly explained how these retirement financing options work, and what type of people could benefit from these types of payouts.

How does an annuity work?

An annuity product can be purchased through an insurer and, in essence, guarantees an income for the rest of your life. That means whether you live for another five or 40 years your insurer will provide an income for this period.

In exchange they will be entitled to your pension pot, making this a risk to consider. You might earn more than the original value of the funds through your insurer’s regular income or you could die unexpectedly, leaving the insurer with your pension pot when it could have been used as an inheritance.

It is important to remember that those with a worse life expectancy could secure a higher annuity payout. For example, those who regularly smoke, are overweight, or are simply older could access a more favourable regular income than their more healthy or younger counterparts.

How does a drawdown plan work?

Alternatively, those who are happy with a bit more risk, or who are concerned about providing an inheritance for a loved one could opt for a drawdown plan. This allows you to keep your pension invested, but still withdraw a certain amount from your pot on a regular basis.

Importantly, when you die your estate will benefit from any remaining money from your pension pot.

Of course, the risk is that you might live longer than anticipated and your pension pot will leave just a minimal amount, or nothing at all, to pass on as an inheritance.

Can I use both?

Luckily, there is always the option to use both forms of retirement income to balance the risk.

You could purchase an annuity with some of your pension pot and continue using the rest as an investment. This could provide some sort of inheritance for your family if you choose not to use it as an income later down the line.

Otherwise, if you are primarily concerned about your spouse, you could opt for a a joint annuity that continues until the second person dies. This can be negotiated a few ways at a reduced rate, paying the same regular income or a reduced amount after the first death.

For more information on these and other retirement products, visit:

Michael Brown is a journalist specialising in personal finance for