Drawdown vs annuity — choosing how to take your pension
Quick answer: At retirement you can take a guaranteed income for life (annuity), stay invested and draw an income flexibly (drawdown), or combine both.
At retirement you can take a guaranteed income for life (annuity), stay invested and draw an income flexibly (drawdown), or combine both. The right answer depends on how much risk you can take and how much guaranteed income you need.
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Primary source: https://www.fca.org.uk/consumers/pension-options
What an annuity gives you
You hand over a lump sum to an insurer and receive a guaranteed income for the rest of your life. Single-life, joint-life, level or escalating with inflation — each has a different starting rate.
Pros: certainty, no investment risk, you cannot outlive the income. Cons: most types end on death (no inheritance), once bought the decision is final, fixed-amount annuities lose real value over time.
Always shop the open market — your existing provider is usually not the best rate. Disclosing health conditions can boost income meaningfully via an enhanced annuity.
What drawdown gives you
Your pot stays invested. You take an income (and a 25% tax-free lump sum) when you choose. The pot can grow, but it can also fall.
Pros: flexibility, the remainder passes to beneficiaries (currently outside the estate; inside IHT from April 2027). Cons: you bear sequence-of-returns risk — a bad first decade can shorten the pot's life dramatically.
The classic '4% rule' suggests a starting withdrawal rate of 4% (rising with inflation) has historically lasted 30+ years; many UK planners now use 3.0–3.5% as a more conservative starting figure.
Combining the two
A common pattern: buy an annuity that, together with the State Pension, covers your essential spending. Keep the rest in drawdown for flexibility, holidays and inheritance.
This 'income floor' approach removes the worst-case scenario (running out at 90) while keeping upside and inheritance potential on the rest.
Common questions
- Can I change my mind?
- An annuity is permanent once bought — there is a 30-day cooling-off period and after that the decision is final. Drawdown can be converted to an annuity at any time.
- What is the Money Purchase Annual Allowance?
- Once you take taxable income (anything beyond the 25% tax-free cash) from a defined contribution pension, your future Annual Allowance falls from £60,000 to £10,000.
- Does the April 2027 IHT change affect this?
- Yes. From April 2027 most unused defined contribution pension funds will fall within Inheritance Tax. This shifts the calculus toward spending pensions first and preserving ISAs / non-pension assets for inheritance.