Drawdown vs annuity: which is right for me?
Drawdown and annuity are the two main ways UK retirees turn a pension pot into income. Drawdown keeps your pot invested and lets you withdraw flexibly; an annuity exchanges the pot for a guaranteed income for life. Each has clear strengths, and for many retirees the right answer is a blend of the two.
Annuity in one paragraph
An annuity is an insurance contract: you hand over a lump sum, and the provider commits to pay you a fixed income for the rest of your life (or for a specified period). The income can be level (same nominal amount each year), inflation-linked, or index-linked. Once purchased, the decision is largely irreversible — you have traded flexibility for certainty.
Drawdown in one paragraph
Drawdown means leaving your pension pot invested and withdrawing from it as needed. You retain ownership and control, can adjust withdrawals up or down, and any unspent balance passes to your estate (with some inheritance tax (IHT) changes arriving in 2027). The trade-off is that you bear the investment risk and the longevity risk — running out of money is a possibility if returns are poor or you live longer than expected.
Comparison at a glance
| Drawdown | Annuity | |
|---|---|---|
| Income certainty | Variable — depends on returns and withdrawals. | Fixed — guaranteed for life. |
| Flexibility | High — adjust withdrawals year by year. | None once purchased. |
| Investment risk | You bear it. | Insurer bears it. |
| Longevity risk | You bear it. | Insurer bears it. |
| Inheritance value | Residual pot passes on (subject to 2027 changes). | Usually nothing, unless joint-life or guarantee period. |
| Best when | You have other guaranteed income (e.g. State + DB). | You worry about running out of money or want simplicity. |
Why annuities fell out of favour — and why they're back
Through most of the 2010s, low interest rates produced annuity rates so poor (around 4–4.5% for a 65-year-old) that drawdown almost always looked better on paper. After interest rates rose sharply from 2022, annuity rates moved to roughly 6–7% for a 65-year-old, depending on whether the income is level or index-linked.
At 6.5% on a level annuity, £100,000 buys £6,500 a year of guaranteed income for life. Most planners now consider annuities a real option again, especially for the portion of the pot needed for essential spending.
The blended approach
For many retirees, a blend works better than either extreme:
- Annuitise enough to cover essential spending. Combined with the State Pension, an annuity sized to cover housing, food, utilities and transport gives you a "floor" that doesn't depend on markets.
- Drawdown for discretionary spending. The residual pot, in flexible drawdown, funds holidays, gifts, one-off costs and inheritance.
- Annuitise later, not at retirement. Annuity rates rise with age — buying an annuity at 75 is meaningfully cheaper per pound of income than at 65. Many modern plans defer the annuitisation decision until later life.
Practical considerations
- Joint-life vs single-life annuity. A joint-life annuity pays a reduced amount (typically 50% or 66%) to a surviving spouse. The income is lower but protects a partner from impoverishment.
- Inflation-linked vs level. An inflation-linked annuity starts at roughly 30–40% lower than a level annuity but maintains real value. For a 25-year retirement at 3% inflation, a level annuity loses about half its purchasing power by the end.
- Health. Enhanced annuities pay more for people with reduced life expectancy (smokers, certain health conditions). Disclose health honestly when shopping for an annuity quote.
- Provider competition. Annuity rates vary materially between providers. Shopping the open market with your figures (a service called the "Open Market Option") often beats your existing pension provider's quote.
Run your own numbers
The Pension AI planner models drawdown explicitly with stochastic returns; we don't currently model annuity purchases inline, but the comparison can be approximated by treating an annuity as guaranteed income (similar to a defined-benefit pension) in the inputs.