Understanding Retirement Income in the UK: State Pensions, Private Pensions & Your Options

Planning for retirement in the UK often feels overwhelming, but the system is easier to understand once you break it down. Broadly, your retirement income comes from two places:

The State Pension – provided by the government.

Private or Workplace Pensions – built up by you (and usually your employer).

Most of the flexibility you hear about — taking lump sums, drawdown, etc. — applies to Defined Contribution pensions, not the State Pension or Defined Benefit schemes. Here’s how it all works.

1. The State Pension

The State Pension is a regular, taxable payment from the government. It’s designed to be a foundation, not a full retirement income, so most people need additional savings on top.

When can you claim it?

Current State Pension age: 66 for men and women.

Rising to 67: Between May 2026 and March 2028.

How much will you get? (2024/25)

Full New State Pension: £221.20 per week

That’s £11,502 per year.

To receive this in full, you need 35 qualifying years of National Insurance contributions. You need at least 10 years to receive anything at all.

Can you defer it?

Yes — and you’ll receive more money if you do. Every year you defer increases your weekly pension by roughly 5.8%.

2. Private & Workplace Pensions

Your private or workplace pension will be either a Defined Benefit (DB) or Defined Contribution (DC) scheme. The type you have makes a huge difference to your options.

A. Defined Benefit (DB) — “Final Salary” Pensions

These pensions promise a guaranteed income for life based on your salary and years of service. They’re common in the public sector (e.g., NHS, teachers).

Your options:

Take the guaranteed income (sometimes with the option of a tax-free lump sum).

Transfer to a Defined Contribution pension, giving you more flexibility — but this is high risk. You’d be swapping a guaranteed lifetime income for a pot of money that could run out.

If your transfer value is over £30,000, you are legally required to get regulated financial advice before transferring.

B. Defined Contribution (DC) — “Money Purchase” Pensions

This is the most common type today. Your pension is a pot of money built from contributions and investment growth.

When can you access it?

Currently age 55, rising to 57 in April 2028.

You can take the money in several different ways — and even combine them.

3. Your Four Main Options for Defined Contribution Pensions

With DC pensions, you can usually take 25% of your total pot tax-free, up to a maximum of £268,275. The remaining 75% is taxed as income.

Here are your four ways to access the pot:

1. Buy an Annuity

You hand some or all of your pot to an insurance company in exchange for a guaranteed income for life.

Pros:

You won’t run out of money.

Predictable, stable income.

Cons:

You can’t change your mind.

If you die early, payments usually stop (unless you choose protection options).

2. Income Drawdown

Your money stays invested, and you withdraw what you need when you need it.

Pros:

Very flexible.

Your pot can keep growing.

Whatever is left can be passed to your heirs.

Cons:

Investments can fall in value.

You could run out of money if you withdraw too quickly or live longer than expected.

3. Lump Sum Withdrawals (UFPLS)

You keep your pot invested and take cash chunks when needed. Each withdrawal is 25% tax-free, 75% taxable.

Pros:

Flexible and ideal for phased retirement.

Cons:

Large withdrawals can push you into a higher tax bracket.

4. Take the Entire Pot in One Go

You can withdraw the whole pension as cash.

Pros:

Complete control.

Cons:

Major tax trap: 75% of the pot counts as income in that year — meaning a high chance of paying 40% or 45% tax.

4. Key Tax Rules You Need to Know

The 25% Tax-Free Rule

You can take up to 25% of your total pension savings tax-free, either:

all at once (e.g., when entering drawdown), or

little by little through UFPLS withdrawals.

Lump Sum Allowance

Your total tax-free cash from all pensions combined is capped at £268,275.

MPAA — A Common Trap

Once you take taxable income from a flexible pension:

Your annual pension contribution allowance falls from £60,000 to £10,000.

This can seriously limit future pension saving.

Final Thoughts

Retirement planning isn’t one-size-fits-all. Your best mix of State Pension, workplace benefits, and flexible pension access will depend on your financial goals, health, risk appetite, and whether you want to leave money to your loved ones.