Pension Income: Lump Sum vs Annuity

There are several ways to make the most of your pension pot, though if you’re thinking of taking out an annuity for a steady income stream or a lump sum, the rules will depend on whether you have a defined contribution (DC) or defined benefit (DB) pension.

In this article, we provide an overview of the key points you’ll need to consider to help you decide whether to take a lump sum or annuity.

The following topics will be covered:

Before embarking on any large financial decision, it’s always advisable to seek financial advice from experts, like the ones we work with.

They will be able to look at your circumstances and give you advice on what your next steps could be.

Call us on 0808 189 0463 or make an enquiry online and we’ll connect you with someone for a free, no-obligation chat.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

What’s the difference between a lump sum and an annuity?

Is it better to get a lump sum or annuity? In order to answer this, you need to know the difference between them.

Lump sum

A lump sum is where you take a fixed sum of money out of your pension, though how much you can take out in one go will depend on your scheme’s communication factor and whether your pension is a defined benefit or defined contribution plan.

A lump sum withdrawal is typically subject to higher tax rates, and any income left in your pension will gain less interest.

Bear in mind that you are entitled to take out 25% of your pension pot as a tax-free lump sum, which you can take out from aged 55. You may be able to take it out before, though you may face heftier taxes.

If you leave your 25% tax-free lump sum in your pension pot, it could accumulate more interest. For financial advice tailored to your pension type and personal circumstances, make an enquiry today.


An annuity is a pension product that you purchase from an insurance company and is typically taken out by individuals with a higher pension pot (such as a 100k annuity or 200k annuity) looking for a steady income stream. The company then pays you a fixed sum each month, giving you a guaranteed income for life.

What about buying an annuity with a lump sum?

It’s possible to take out a retirement annuity with a lump sum, but most experts would recommend that you take out the government allowance of a 25% tax-free lump sum and spend your remaining 75% on buying an annuity.

Otherwise, your untaxed 25% will automatically become taxed when it becomes an annuity, which means you’ll miss out on the benefits of having built up that pot in the first place.

Can I convert an annuity into a lump sum?

In terms of whether you can do the reverse and convert an annuity into a lump sum, you can, though it’s best to get professional advice first on whether to take out a retirement annuity or lump sum payments. Make an enquiry to get started.

Is an annuity a tax-free lump sum?

Annuities are subject to tax in the same way a salary is. There are usually admin fees applicable on top of taxes, too. This is why it’s so important to understand what you’re getting yourself into before buying an annuity – additional costs could outweigh the benefits.

What is a lump sum annuity payout?

This is when your annuity provider gives you a monthly annuity payout, which is a common choice for annuity holders. Otherwise, you can request to have your payout as a lump sum rather than regular instalments.

What can an annuity or lump sum calculator tell me?

Online pension and annuity calculators can give you an idea of what kind of retirement income you could expect if you were to choose one option over the other.

While using these tools can be great as a starting point, they will only return raw numbers with no context. If you’re trying to decide whether an annuity or a lump sum is the best option for you, speaking to an expert to get a clearer idea of what both choices can offer you is the way to go.

Make an enquiry with us to get started.

What should I know about annuity protection lump sum death benefit?

When you pass away, it doesn’t mean that your pension savings are lost. In the case of an annuity, death benefits are applicable if you have purchased them as a joint annuity. This would mean your spouse would continue to receive payments in your absence.

If you die before you’ve received the guaranteed amount you were expecting to receive, then that balance can be paid out to your spouse as an annuity protection lump sum death benefit.

Speak to a financial expert about lump sums and annuities

If you have a question about any aspect of your pension including whether it’s better to take out a lump sum or annuity, give us a call on 0808 189 0463 or make an enquiry online. We’ll put you in touch with one of the experienced specialists that we work with for a free, no-obligation chat.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.

Book a free, no-obligation pension review today