How much of your pension should you annuitise to cover essential spending?
The useful answer is not a percentage. It is the amount needed to close the gap between the income you already have guaranteed and the spending you cannot reduce — and for many UK households with a full State Pension record that gap is far smaller than they expect.
- The calculation: essential spending less State Pension and any defined benefit income.
- The effect: everything above it becomes discretionary, which is what makes a flexible plan possible.
- The shape: index-linked, because essential spending rises with prices.
- The timing: it can be bought in tranches rather than all at once.
Tom's essential spending came to £22,000 and his State Pension plus a small scheme pension came to £17,500. The gap was £4,500 a year, which is a far smaller annuity than the rules of the road suggested.
01 The gap, not a percentage
Start with essential spending: housing, council tax, utilities, food, insurance, transport, and anything else that cannot be reduced without hardship. Then subtract the income that already arrives guaranteed — the State Pension and any defined benefit pension.
What remains is the gap, and it is the amount worth annuitising. For a couple with two full State Pensions of about £25,100 between them and a home owned outright, that gap is frequently small or zero.
This is why percentage rules mislead. A household with a large guaranteed base and one with none should not annuitise the same share of their pot, and the rule cannot tell them apart.
It is worth doing the essential-spending calculation honestly rather than optimistically. Most households that write the list find items they had classed as discretionary which are not — a car in a rural area, a phone contract, the standing charges on utilities — and items they had classed as essential which are. The list decides the size of the annuity, so it deserves an evening rather than an estimate.
Shows: the annuity purchase needed to close the gap between guaranteed income and essential spending. Ignores: tax, the shape of the annuity, inflation on the essentials, and any change in your spending.
On the defaults above, the worked example shows £69,231. A gap of £4,500 a year needs about £69,231 of pension to annuitise, leaving the rest invested.
Source: Plan your retirement income
02 What the floor buys you
Once essential spending is guaranteed, everything the portfolio pays for is discretionary — and a discretionary withdrawal can be cut in a bad year. That is what makes a flexible withdrawal rule usable rather than theoretical.
The consequence is counterintuitive: annuitising part of the pot lets the rest be invested more aggressively, because the consequence of a fall is a smaller holiday rather than a colder house. The household's overall risk falls while the portfolio's risk can rise.
It also removes the worst outcome. A portfolio that runs out at 92 is a catastrophe; a portfolio that runs out at 92 alongside an index-linked annuity covering the essentials is a reduced standard of living.
Source: Retirement income market data
03 Which shape to buy
Index-linked, because the spending it covers rises with prices. A level annuity covering essential spending is a floor that sinks, and the crossover arithmetic is beside the point when the purpose is protection.
Joint-life where there is a partner who would otherwise be short, because the floor has to survive the first death. That decision cannot be revisited after purchase and it is where a single-life quotation quietly fails a household.
Enhanced where health qualifies, which is a question of disclosure rather than negotiation. A declared condition can raise the income materially on the same premium.
Do not compromise on the shape to reach a starting income you like. If the quotation for an index-linked joint-life annuity is disappointing, the answer is to buy less of it rather than to buy a level single-life one instead — a smaller floor that holds is worth more than a larger one that erodes and stops on the first death.
Source: MoneyHelper: guaranteed retirement income (annuities)
04 When to buy it
Not necessarily at retirement. Annuity rates rise with age, so deferring the purchase while a portfolio funds the early years is a legitimate strategy — and it means the floor is bought when it is most needed rather than when it is cheapest to postpone.
Buying in tranches spreads the interest-rate risk of a single purchase date, in the same way regular investing spreads a purchase price. Two or three tranches across a decade removes most of the timing question.
What argues against waiting is health: an annuity is bought once and the rate is fixed forever, so a diagnosis between now and then changes the answer, usually favourably. That cuts both ways and is worth acknowledging.
Source: Bank Rate and how it works
05 The order of the whole decision
Calculate essential spending. Establish guaranteed income. Annuitise the gap, index-linked and joint-life where relevant. Then set a withdrawal rule for the remaining portfolio, which can now be flexible because the floor is in place.
Review the essentials rather than the percentage, because it is the spending that moves. A mortgage ending, a car replaced, or care costs beginning all change the gap and therefore the floor.
And keep enough outside the annuity to matter. An annuity cannot be undone, so a household that annuitises everything has bought certainty and given up every option that comes with capital.
One number is worth writing down alongside the decision: what the household would live on if the portfolio were worth nothing. That figure is the floor you have actually built, and it is the only test of whether the annuity is the right size.
Source: Retirement Living Standards
Nobody should be answering this with a percentage. The number you want is the gap between what you must spend and what already arrives guaranteed, and for a UK household with two full State Pensions and no mortgage that gap is often a few thousand pounds. Annuitise that, index-linked, joint-life if there is a partner — and then notice what it does to the rest of the plan. Once the heating bill is safe, every other withdrawal becomes something you are allowed to reduce, and that flexibility is worth more than any fund choice you will ever make.
FAQ
What percentage should I annuitise?
The wrong question. Annuitise the gap between your essential spending and your guaranteed income, which depends entirely on your State Pension record and any defined benefit pension. Two households with the same pot can have completely different answers.
Does annuitising reduce my overall risk?
It reduces the risk that matters and lets the portfolio take more. Once essential spending is guaranteed, the remaining withdrawals are discretionary and a fall means a smaller holiday rather than hardship — which is what permits a higher equity weighting.
Should I buy it at retirement?
Not necessarily. Rates rise with age, so funding the early years from a portfolio and buying the floor later is legitimate. Buying in two or three tranches across a decade spreads the interest-rate risk of a single purchase date.
What if I annuitise too much?
It cannot be undone. An annuity converts capital into income permanently, so a household that annuitises everything has bought certainty and given up every option capital provides — including the ability to meet a large one-off cost.
Sources
Regulator references
- Plan your retirement income · GOV.UK · 2025The government's own sequence for turning pension pots into income.Last verified: 2026-09-07
- Retirement income market data · Financial Conduct Authority · 2025What UK savers actually do at retirement, measured rather than assumed.Last verified: 2026-09-07
- MoneyHelper: guaranteed retirement income (annuities) · MoneyHelper · 2025The government-backed explanation of annuity shapes and the options priced into them.Last verified: 2026-09-07
- Bank Rate and how it works · Bank of England · 2025The policy rate that drives the mortgage and cash comparisons here.Last verified: 2026-09-07
- Retirement Living Standards · Pensions and Lifetime Savings Association · 2025The minimum, moderate and comfortable income benchmarks used as the target.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.