Drawdown vs annuity — choosing how to take retirement income from a UK pension

At some point in retirement — currently from age 55, rising to 57 in 2028 — you can start taking money from a defined contribution pension. The two main routes are flexi-access drawdown and annuity purchase, and the choice between them shapes your retirement income for the rest of your life.

Pension freedoms in 2015 made drawdown the popular default for most retirees, but rising interest rates have made annuities meaningfully more attractive in the last few years. This is the realistic comparison.

The two products

Annuity: you hand a lump sum from your pension to an insurance company. In exchange, they pay you a fixed (or inflation-linked) income for the rest of your life — and, if you choose, for your spouse’s life after you. Once bought, the decision is largely irreversible.

Drawdown: your pension stays invested. You withdraw cash from it as and when you want, in whatever amounts you want. The pot rises and falls with markets, and runs out if you withdraw too quickly or returns are poor.

In both cases, the first 25% of the pension is tax-free (subject to the Lump Sum Allowance — see our LSA/LSDBA guide). The other 75% is taxed as income at your marginal rate when withdrawn, regardless of route.

What an annuity actually buys

The income rate an annuity pays depends on:

• Your age at purchase. Older = higher annuity rate, because the expected payment period is shorter.
• Interest rates at the time of purchase. Annuity rates broadly track long-dated gilt yields.
• Health factors. Diagnoses, smoking history, and other underwriting factors can boost rates by 10–40% via “enhanced” or “impaired-life” annuities.
• The features you choose. Inflation-linking, spouse’s pension, guarantee periods all reduce the headline rate.

A 65-year-old in 2026 with no health issues buying a level (flat) single-life annuity might receive 6–7% of the purchase price annually — so £100,000 of pension could buy around £6,500 a year for life. An inflation-linked annuity, paying out the same starting income but rising with CPI, would start at maybe £4,500 a year.

These rates were closer to 4–5% in the low-interest-rate era (2010–2021) and were a major reason drawdown became the popular choice. The rate environment has rotated since 2022.

What drawdown actually does

Drawdown is closer to a self-managed bank account where the balance is invested in equities, bonds and cash according to your choices.

You take a tax-free lump sum (up to 25%) if you want, or take it gradually as part of each withdrawal — the latter is called UFPLS (Uncrystallised Funds Pension Lump Sum).

Each withdrawal is taxed as income at your marginal rate. The pot stays invested and can grow or shrink based on market performance and how much you take out.

If you die before age 75, the remaining pot can usually pass to your beneficiaries tax-free. After 75, beneficiaries pay income tax on withdrawals. This inheritance treatment is one of the biggest differentiators against annuities — most annuities die with you, while drawdown pots can pass down.

(Note: a Budget announcement in late 2024 confirmed pensions will be brought into the Inheritance Tax framework from April 2027. The income-tax-on-withdrawal rules for beneficiaries continue to apply separately. See our guide on pensions and inheritance tax from April 2027 for the detail.)

The core trade-off

Annuity:

• Guaranteed income for life. Never runs out. The insurance company carries the longevity risk.
• No investment decisions. Once bought, it’s a fixed product.
• Limited or no inheritance — most income dies with you unless you bought specific spouse/guarantee features at the cost of a lower headline rate.
• Inflexible. You can’t take an extra lump for a one-off expense; you get what was set up.
• Irreversible. No undo button if rates or your circumstances change.

Drawdown:

• Flexibility. Take what you need, when you need it. Pause or restart withdrawals. Take a big one-off sum for a one-off purpose.
• Investment growth potential. The pot stays invested; in good markets, it can sustain higher income or last longer than expected.
• Inheritance. Pot can pass to beneficiaries on death.
• Sequence-of-returns risk. A bad market early in retirement, combined with high withdrawals, can permanently impair the pot.
• Longevity risk. Live longer than expected and you can outlive the money.

The hybrid approach

The pure either/or framing is less common in practice than the textbooks suggest. A common approach is to use an annuity to cover the essential floor and drawdown for the rest.

For example, a couple with £400,000 of combined defined contribution pension and combined state pensions of £23,000 might:

• Calculate essential annual spending: £30,000 (housing, food, utilities, basic transport, health).
• State pension covers £23,000 — leaves a £7,000 gap to fill with guaranteed income.
• Buy a joint-life annuity of £7,000 a year, using ~£110,000 of the £400,000 pot.
• Keep the remaining £290,000 in drawdown for discretionary spending, lump-sum purposes, and inheritance.

This gives the security of guaranteed essentials coverage with the flexibility and inheritance benefits of drawdown for the rest. It also means the annuity portion can be bought later in retirement (when rates may be higher and underwriting more generous) rather than all at age 60.

The sustainable withdrawal question

For people choosing drawdown, the central question is: how much can I take out each year without running out?

Academic research from the US in the 1990s produced the so-called “4% rule” — withdrawing 4% of the starting pot annually, rising with inflation, lasts at least 30 years with high probability based on historical US returns. The UK equivalent comes out at roughly 3.5% based on UK-specific data and current bond yields.

So a £400,000 drawdown pot at age 65 might sustainably support £14,000 a year of inflation-linked withdrawals for 30 years — assuming a globally diversified portfolio, regular rebalancing, and a willingness to flex withdrawals in bad market years.

Higher withdrawal rates work in some scenarios but increase the risk of pot depletion in poor sequences. Lower withdrawal rates leave more headroom but mean lower lifestyle.

Annuity rates of 6–7% at age 65 currently look very competitive against a sustainable 3.5% drawdown rate. The annuity carries no investment growth potential and no inheritance, but the income guarantee is real — and the rate gap is much narrower than it was a few years ago.

The decision frame

A practical framework:

1. What proportion of your essential spending is already covered by state pension and any defined benefit pensions? The bigger that covered floor, the more freedom you have to take risk with the DC pot in drawdown.

2. How comfortable are you with investment decisions and market volatility? Drawdown requires ongoing engagement. If markets fall 30% in your second year of retirement, can you keep your nerve and continue withdrawing — or will you sell at the bottom?

3. How much value do you place on inheritance? Drawdown pots can pass to beneficiaries (with the new IHT rules from April 2027). Annuities mostly die with you (or your spouse if you bought joint-life).

4. What’s your health and family longevity picture? Strong health and family longevity = annuities pay out longer = good value relative to drawdown depletion. Poor health = enhanced annuity rates can be excellent value; but drawdown with intent to leave wealth to family may be better.

5. What’s your appetite for complexity vs simplicity? Annuities are set-and-forget. Drawdown is an ongoing investment management task.

Specific patterns that work well

• Annuity for the essential floor + drawdown for the rest. Covered above.
• Stagger annuity purchases over the first 10 years of retirement. Buying annuities at 65, 70 and 75 in three tranches captures different rate environments and gets higher rates per tranche as you age.
• Drawdown until life expectancy stabilises, then partial annuity. Use drawdown in early retirement when flexibility matters most (managing taxable income, large one-off expenses), then convert part of the remaining pot to annuity later for longevity insurance.
• Pure drawdown with very conservative withdrawal rate. For high-net-worth retirees with substantial other assets, drawdown at a 2.5–3% rate is essentially over-funded and the inheritance benefits dominate.

Specific patterns that don’t work well

• Pure annuity at 55 with full pot. Locks you into the rates and your circumstances at the earliest possible moment. Almost always worth keeping some flexibility.
• Drawdown at maximum withdrawal rate. Withdrawing 6–7% from a drawdown pot has high pot-depletion risk over a 30-year retirement; you’d be matching annuity rates without the longevity guarantee.
• Annuity with no spouse coverage when you have a spouse depending on the income. A single-life annuity that pays a higher headline rate but stops at your death can leave a spouse in serious financial difficulty.

The advice question

Drawdown decisions are one of the most genuinely advice-heavy areas of UK personal finance. The interactions of marginal tax bands at withdrawal, sequence-of-returns risk, longevity assumptions, IHT planning and product features are complex enough that DIY drawdown carries real risk for most people.

Pension Wise — the free government service from MoneyHelper — offers a single guidance appointment at age 50+ that covers the options. It’s guidance, not personalised advice. For larger pots and more complex situations, an FCA-regulated independent financial adviser specialising in retirement income is the more thorough option, at a cost typically of 1–2% of the assets advised on.

For the related question of what tax-free lump sums you can take, see what is the 25% tax-free pension lump sum. For consolidating pensions before retirement, see how to combine old pensions.

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Last updated 1 June 2026. This guide is educational and is not personal financial advice. Drawdown and annuity decisions are highly individual and reversibility varies; consider regulated financial advice before committing to a retirement income strategy. See our disclaimer.