My Half-Annuity Plan

I keep coming back to the same rough plan: annuitise half the pot, drawdown the other half. Not because it's optimal on any single axis — it isn't — but because it solves the problem I actually have, which is "I don't want to spend the next 30 years reading market updates and wondering if I need to cut back."

This post walks through exactly what happens to a £1m pot under that plan, what the tax-free cash actually buys, and the seven places you can park £125k of PCLS once you've taken it. I'll explain my reasoning at each step. Your situation is almost certainly different; the reasoning might still be useful.

The arithmetic, step by step

Imagine £1m in a SIPP, and you tell the simulator: annuity percent = 50%, take 25% PCLS at purchase, lifetime, RPI-linked, joint life. Here's where every pound goes.

One thing worth calling out: "50% to annuity" doesn't mean 50% goes to the insurer. It means 50% is crystallised for annuity purposes. Because a quarter of that bounces straight back to you as PCLS, only 37.5% of your original pot actually funds the guaranteed income. This confused me for an embarrassing amount of time, so it probably confuses other people too.

What each slice actually does for you

£375,000 — the annuity

RPI-linked joint-life annuities start at a much lower headline yield than level annuities because they grow over time. Realistic starting rates for a healthy 60-year-old sit around 3.5–4% depending on gilt yields and underwriting — so £375k buys somewhere in the region of £13,000–£15,000/year of starting income, rising with inflation for life. Level (non-escalating) rates are materially higher — 6–7% is realistic — but the income doesn't grow, so inflation eats it.

Do not plan around a specific number until you've got real quotes. Rates move with gilt yields, differ between providers by surprisingly large margins, and impaired-life or smoking-status underwriting can add 10–30% to the yield. A 60-minute call with HUB Financial Solutions or Retirement Line costs nothing and gives you real numbers.

The point isn't the exact yield. The point is: the annuity isn't going to make you rich, it's not going to track the FTSE. What it is going to do is arrive in your bank account every month until one of you dies, and then continue at a reduced rate for the survivor.

That's what I'm buying: a number I can plan around. The kind of number you can tell your partner without following it with "…assuming markets don't do another 2008."

£500,000 — the drawdown pot

This stays invested in your SIPP, grows (hopefully) with markets, and funds the variable side of retirement — the holiday that turned into two holidays, the boiler that gave up, the grandchild that needs help with a deposit.

Your £268,275 lifetime tax-free allowance (LSA) at this point is partly used.Taking £125k as PCLS on the annuity purchase leaves you £143,275 of LSA remaining — that's the total tax-free cash you can still take from the £500k drawdown pot over your lifetime.

Two mechanisms for accessing that drawdown pot, and they have different side-effects:

• Flexi-access drawdown — crystallise chunks of the pot as you need them, take up to 25% of each chunk as tax-free cash (within your remaining LSA), rest sits in "drawdown" where withdrawals are taxable income.
• UFPLS (Uncrystallised Funds Pension Lump Sum) — each withdrawal is automatically 25% tax-free / 75% taxable, pro-rata, up to the LSA cap.

Crucial detail I glossed over in the first draft: the moment you take any taxable pension income from a flexi-access arrangement, or your first UFPLS withdrawal, you trigger the Money Purchase Annual Allowance (MPAA). Your future contribution cap drops from £60k/year to £10k/year for the rest of your life. The annuity purchase itself doesn't trigger MPAA, but the first taxable withdrawal from drawdown absolutely does.

The key planning point: because the annuity is already covering your essentials, you can afford for the drawdown pot to wobble in the short to medium term. Markets crash at 65? Spend less from drawdown that year, the annuity still turns up. You're not forced to sell low to eat.

The honest caveat: "afford to wobble" is true early on, less true at 80+ after a bad sequence of returns. A 20-year market run is long enough for real damage even with an annuity floor — especially if inflation erodes the real value of your drawdown withdrawals. That's the residual risk you're accepting by not annuitising more. Worth eyeballing the 10th-percentile outcome in the simulator rather than just the median.

£125,000 — the tax-free cash, which is the interesting bit

This is the lump sum you take out of the system at the annuity-purchase moment. It's genuinely tax-free, it's yours, and the question is: where do you put £125k when the ISA annual limit is £20k?

Glad you asked. Here are all seven options I know of, roughly in order of what I'd actually do first.

The seven wrappers for £125k of tax-free cash

1. Premium Bonds — my favourite boring answer

For a couple, £100k of the £125k slots straight in here. Important distinction: the 4.15% is the prize rate — the average return across all holders — not a guaranteed yield. Your actual return in any given year could be zero, could be substantially below 4.15%, and yes, could theoretically be a million. The larger your balance, the closer your long-run returns tend to approximate the prize rate, but "closer" isn't "equal to". For a £50k holding, most years you'll do OK; some years you'll do noticeably worse than a best-buy savings account paying the same headline rate.

What Premium Bonds genuinely win on: tax-free at any balance (no PSA or dividend-allowance juggling), backed by HM Treasury rather than the £85k FSCS cap, instant access, no paperwork. For a retiree with a large cash float who'd otherwise be fighting with savings interest hitting higher-rate tax, that combination is hard to beat — even if the expected return is a fraction below top-flight savings accounts.

2. Stocks & Shares ISA — the best long-term wrapper, but rationed

At £40k/year combined with a spouse, you could get the whole £125k sheltered in about three tax years if you drip-fed it. The technique is called "bed and ISA": hold the surplus in a GIA, each April sell £20k of holdings, use your CGT allowance on any gain, buy the same thing back inside the ISA. Rinse and repeat until sheltered.

3. Pension top-up — powerful, but read the HMRC warning first

With that firmly flagged: whether a pension top-up is actually useful depends on your tax rates going in vs coming out. If you're a basic-rate payer both sides and you've already used your 25% tax-free on this new money, it's essentially a wash — £8 net in, grossed up to £10 in the pot, taxed at 20% on the way out, £8 back. The only real win is tax-sheltered growth while it sits there.

The version that's genuinely good:

• Higher-rate in, basic-rate out. £6 net goes in (40% relief, claimed via self-assessment if it's not salary sacrifice), £10 lands in the pot, and at retirement you pay 20% — a permanent 20p-in-the-pound uplift on every gross pound contributed. Salary sacrifice sweetens it further via NI savings.
• 25% tax-free allowance not yet exhausted. Then a quarter of the eventual withdrawal comes out tax-free regardless of your rate, turning the round-trip positive even at basic rate both sides.

So the door opens for: part-time consulting, a bit of self-employment, a spouse still earning at higher-rate. Just don't draw an arrow from the PCLS cheque to the pension contribution and expect HMRC to look the other way.

4. Gilts held directly — the secret tool of higher-rate retirees

If you're a higher-rate taxpayer in retirement, low-coupon gilts held to maturity are remarkably efficient. You pick up most of your return as CGT-free capital appreciation rather than taxable coupon income. Build a gilt ladder — say one gilt maturing each year for five years — and you've got known cashflows with minimal tax drag.

Interactive Investor, Hargreaves Lansdown and AJ Bell all let retail investors buy gilts directly. It's a little fiddlier than a tracker fund but the tax saving can be substantial for the right person.

5. Fixed-rate savings bonds / NS&I Income Bonds

The boring, reliable home for money you want to deploy in the next 5 years. Fixed rates lock in current yields, so if the Bank of England cuts rates, you're protected. Downside: you usually can't access the money early without penalty.

6. General Investment Account — the overflow bucket

The GIA is where money lives while it waits to be "bed-and-ISA'd" into the ISA each April. It's also where anything beyond the other wrappers ends up. For small holdings of equity index trackers, the tax drag is manageable if you're sensible about realising gains in chunks that fit under the CGT allowance.

7. VCTs, EIS, SEIS — only if you know what you're doing

The relief is real. So is the risk. These are investments in small UK companies — some of which genuinely will fail. I'd consider VCTs only if I'd already filled every other wrapper, could afford to lose the capital without it affecting retirement, and had explicitly decided I wanted that risk. I wouldn't touch EIS or SEIS without advice.

A practical allocation for £125k (couple, retiring)

Each subsequent April: shift £20k from GIA → ISA, let your spouse fill theirs, and the whole stash is tax-wrapped within 3–4 years.

The part where I tell you this isn't advice, again

If the sums here are meaningful to you — and anything with a seven-figure pot usually is — pay an IFA. Fee-based, not commission. A few hours of a regulated adviser's time will answer "what tax wrappers suit your circumstances" in a way that a blog post, or a calculator, never can.

But if you've already had that conversation and you're just trying to understand where the money goes — or you're three years out from retirement and sketching options on a napkin — I hope this helped. Go run your own scenario in the calculator, grab a share link, send it to your spouse or your IFA, and have the real conversation.

One last time, for the regulators reading: I am not a financial adviser. This is not financial advice. I built a calculator; I have opinions. Those are two different things.