Turning pensions into income: the five decisions

Retirement income planning has an intimidating vocabulary — UFPLS, sequencing risk, safe withdrawal rates, beneficiary drawdown — and behind all of it sit five questions. Everything else is detail hanging off one of them.

You don't have to answer them in one sitting, and you don't have to answer them alone. But you do have to answer them, because deciding nothing is itself a decision, usually an expensive one.

Decision 1: When can you afford to stop?

Not when you want to stop, and not when your State Pension age says you may — when the numbers say you can. This is the question everything else depends on, because a plan that starts two years too early will fail no matter how well the other four are handled.

Answering it needs two figures: what you'll actually spend, and what your pots will actually produce. Most people are surprised by both. Spending in retirement is rarely the flat line that projections assume, and the income a pot can safely support is usually lower than the headline value suggests.

→ Deep dive: Working out what you actually need

Decision 2: Guaranteed income, or flexible income?

An annuity converts capital into an income you can't outlive. Drawdown keeps the money invested and lets you take what you like, with the risk that it runs out. Neither is right in the abstract.

Annuity rates fell so far during the 2010s that a whole generation of savers wrote them off, and many advisers stopped mentioning them. Rates have moved substantially since 2022, and the option deserves a fresh look — particularly the enhanced terms available to anyone with health conditions, which are the most under-claimed advantage in the entire market.

Which one fits depends entirely on your circumstances, and there's no general answer. As a very rough steer, an annuity tends to appeal to someone who is risk averse and has a fairly clear idea of the income they need, with no particular expectation that it will change. Drawdown tends to appeal to someone who wants to vary what they take — more in the active early years, less later on. Even those are illustrations rather than rules, and plenty of people use both.

→ Deep dive: Annuity or drawdown?

Decision 3: Which pot do you spend first?

You'll likely arrive at retirement with several pots — pension, ISA, general investment account, cash — each taxed completely differently on the way out. Two people with identical savings and identical spending can pay wildly different amounts of tax purely through the order they draw.

The years between finishing work and your State Pension starting are the most tax-efficient window most people will ever get, and it's remarkably easy to sleep through it.

→ Deep dive: Which pot do you spend first?

Decision 4: How much can you take without running out?

The "4% rule" is the most repeated number in retirement planning and one of the least examined. It came from American data, over a 30-year horizon, with no State Pension underneath it and a different tax system on top.

The more useful framing isn't a single percentage but a rate you adjust as you go, informed by two things the fixed-rate approach ignores: sequencing risk, which is the brutal maths of a market fall in your first few years, and the fact that real retirement spending tends to fall through the middle years before rising again at the end.

→ Deep dive: How much can you take without running out?

Decision 5: What happens to what's left?

Pensions have spent a decade as the most efficient way to pass wealth down: outside your estate for inheritance tax, and free of income tax entirely if you died before 75.

From April 2027 that changes, and for anyone with an estate above the nil-rate bands the pension shifts from best asset to leave behind to one of the worst. This single change reaches back into all four earlier decisions — particularly the order you spend in.

→ Deep dive: What happens to what's left

How the five fit together

They aren't independent. Decision 1 sets the income target that Decision 4 has to sustain. Decision 2 determines how much of that target is guaranteed, which changes how much risk Decision 4 can carry. Decision 3 determines the tax cost of hitting the target at all. And Decision 5 has just rewritten the logic of Decision 3.

A sensible order to work through them:

1. Establish the number. Everything else is guesswork until you know what you need.
2. Decide the floor. How much of that number must be guaranteed for you to sleep at night?
3. Set the withdrawal order. This costs nothing and saves the most.
4. Set a withdrawal rate, and a rule for changing it. Not a number for life — a starting point and a review trigger.
5. Sort the paperwork. Expression of wish forms, beneficiaries, and a plan that accounts for the 2027 changes.

Steps 3 and 5 are the cheapest wins on this list and the ones most often left undone.

Where the calculator fits

The Retirement Readiness Calculator answers decisions 1, 3 and 4 with your own figures: your projected income, the age your pots run dry, and the monthly shortfall if there's one. It models the tax-efficient withdrawal order described in Decision 3, so you can see what that order is worth to you specifically rather than in the abstract. If the answer comes back worse than you hoped, If the numbers don't work sets out what actually moves the needle.

It can't make decisions 2 and 5 for you. Those depend on things no calculator knows — your health, your family, how you feel about risk, and what you want the money to do after you've gone.

This topic is for general education only and isn't personal advice. These decisions are largely irreversible and interact with each other in ways that are hard to see one at a time — if you'd like yours looked at together rather than in isolation, get in touch.