Pension Drawdown vs Annuity in Later Life
You don't have to choose only one. Many retirees use a blended approach — buying a smaller annuity to cover essential living costs, while keeping the rest in drawdown for flexibility and growth potential. This removes the all-or-nothing pressure from the decision.
Deciding how to turn your pension pot into retirement income is one of the biggest financial decisions most people make — and drawdown versus annuity is the central choice. Neither is automatically better; they suit genuinely different needs and risk tolerances. Here's a clear comparison.
How Each Option Works
Drawdown (flexi-access drawdown) keeps your pension pot invested while you withdraw income flexibly, as much or as little as you choose, whenever you choose. Your pot can continue growing — but it can also fall in value, and there's a genuine risk of running out of money if withdrawals aren't managed carefully.
An annuity is an insurance product — you exchange some or all of your pension pot for a guaranteed income for life (or a fixed term). It removes investment risk and the risk of outliving your money entirely, but is generally irreversible once set up, and offers no flexibility to access extra capital later.
The Tax-Free Lump Sum (Applies to Both)
Regardless of which route you choose, you can generally take up to 25% of your pension pot tax-free (subject to the Lump Sum Allowance of £268,275), either as a single upfront payment or in smaller slices alongside taxable withdrawals.
Everything beyond that 25% is taxed as income at your marginal rate — so large withdrawals in a single year can push you into a higher tax band.
Current Annuity Rates and Drawdown Sustainability
As of 2026, annuity rates remain at their highest levels in over a decade — a standard single-life level annuity for a 65-year-old with a £100,000 pot currently pays roughly £6,400-£7,200 per year, with enhanced rates available for those with health conditions.
For drawdown, a commonly cited sustainable withdrawal rate is around 3.7-4% per year — withdrawing significantly more increases the real risk of exhausting the pot, particularly if poor investment returns occur early in retirement (known as sequence-of-returns risk), since a downturn early on can permanently damage a pot in a way the same downturn later wouldn't.
What Happens on Death
This is one of the starkest differences between the two options. A standard annuity generally cannot be passed on — unless you specifically paid for protection (like a guarantee period or joint-life option) at the outset, the income simply stops when you die.
A drawdown pot, by contrast, can be passed to nominated beneficiaries. If you die before age 75, they can typically inherit it tax-free; if after 75, they pay income tax at their own marginal rate on withdrawals.
Worth noting: from April 2027, most unused pension funds, including drawdown pots, will be brought into scope for inheritance tax for the first time — a significant change worth reviewing if this has been part of your estate planning. See our related guide on how this interacts with wider IHT planning.
Which Suits You
Drawdown tends to suit those who want flexibility, have other guaranteed income (like a defined benefit pension or full State Pension), are comfortable with investment risk, and want the option to leave money to beneficiaries.
An annuity tends to suit those who want certainty above all else, are less comfortable managing investment decisions, or don't have other guaranteed income to fall back on.
Independent financial advice is strongly recommended before deciding — this is a largely irreversible decision (for the annuity portion at least), and Pension Wise offers free, impartial guidance specifically on this choice before you commit.
Related Reading
Not sure which option fits your circumstances?