Why it’s important
When you retire, your pension pot stops growing and starts paying you back. But how you take that income is one of the biggest financial decisions you’ll ever make.
You have two main routes:
1️⃣ Buy an annuity — guaranteed income for life.
2️⃣ Stay invested and use drawdown — flexible, market-linked income.
Both have pros and cons. The right mix can mean peace of mind and long-term flexibility. Get it wrong, and you could run out of money too soon or lock yourself into a deal you later regret.
What you need to know
1️⃣ What an annuity is
An annuity converts your pension pot into a guaranteed income for life.
You hand some (or all) of your pot to an insurance company, and they pay you a fixed or inflation-linked amount each month until you die.
It’s secure and predictable — your income doesn’t depend on market performance.
Key features:
- Guaranteed for life (no matter how long you live).
- Can be single or joint life (pays your spouse after you die).
- Options for inflation protection or minimum payment terms.
- Once bought, it’s irreversible — you can’t cash it back in.
2️⃣ What drawdown is
Income drawdown keeps your pension invested. You decide how much to withdraw and when.
Your pot can still grow — but it can also fall in value.
Key features:
- Flexible — take as much or as little as you need, when you need it.
- Inheritance-friendly — anything left when you die can pass to your beneficiaries.
- Market-dependent — income isn’t guaranteed; you bear the risk.
- You can take the first 25% tax-free, then pay income tax on withdrawals.
In short:
Annuity = certainty, no flexibility.
Drawdown = flexibility, no certainty.
3️⃣ How the numbers look
Annuity rates have improved recently thanks to higher interest rates.
Example:
- A 65-year-old could currently get ~6% a year from a level annuity — about £6,000 a year from £100,000.
- Choose inflation protection and that drops closer to 4.5%, but rises over time.
With drawdown, there’s no fixed “rate.” If you take 4% a year from £100,000, that’s £4,000 — but your pot stays invested and could grow or shrink depending on markets.
In good years, you might earn more than 6%. In bad years, much less.
4️⃣ The pros and cons
| Feature | Annuity | Drawdown |
|---|---|---|
| Income guarantee | ✅ Lifetime guaranteed | ❌ Depends on markets |
| Flexibility | ❌ Fixed once bought | ✅ Full control over withdrawals |
| Inheritance | ❌ Usually none (unless add-ons) | ✅ Remaining funds can pass to heirs |
| Inflation protection | ✅ If selected (lower starting rate) | ✅ If investments grow |
| Investment risk | ❌ None | ✅ / ❌ You take the risk |
| Tax efficiency | Same 25% tax-free, rest taxed as income | Same |
No option is perfect — it’s about matching your personality, needs, and risk comfort.
5️⃣ The hybrid approach
You don’t have to choose one or the other.
Many retirees combine them:
- Use an annuity to cover essential bills (mortgage, utilities, food).
- Keep the rest in drawdown for flexibility and growth.
That way, you get peace of mind on the basics and freedom with the extras.
This “core and explore” method works particularly well if:
- You have a moderate-to-large pension pot.
- You value steady income but don’t want to give up control entirely.
6️⃣ When each makes sense
Annuity may suit you if:
- You can’t afford for your income to fluctuate.
- You want guaranteed income for life (especially if you’re in good health and expect a long retirement).
- You don’t want to manage investments.
- You don’t need to leave your pot to heirs.
Drawdown may suit you if:
- You’re comfortable with market ups and downs.
- You want control and flexibility (for travel, gifts, or varying income).
- You plan to pass remaining funds to family.
- You already have other stable income sources (e.g. State Pension, rental income).
7️⃣ Health and annuity rates
Your health can boost your annuity income.
“Enhanced annuities” pay higher rates if you have certain medical conditions or lifestyle factors (like smoking or high blood pressure).
Always shop around — quotes vary hugely between providers.
An independent financial adviser or comparison service can find the best rate for your situation.
8️⃣ The tax angle
Both options are taxed the same:
- First 25% of your pension is tax-free.
- The rest is taxed as income.
A big lump-sum withdrawal could push you into a higher tax band — a common mistake.
If using drawdown, it’s often smarter to spread withdrawals over multiple years.
What you should do next
✅ Step 1: Work out your essential spending
Add up your fixed monthly costs. This is the amount you can’t afford to lose.
✅ Step 2: Compare annuity quotes
Use comparison sites or a regulated adviser to get personalised rates.
Check options for joint life, inflation linkage, and guaranteed periods.
✅ Step 3: Decide how much security you need
If you like certainty, annuitise enough to cover core expenses. Keep the rest flexible.
✅ Step 4: Review your investment plan
If staying in drawdown, ensure your portfolio matches your withdrawal needs — some cash for short-term income, some bonds and shares for growth.
✅ Step 5: Check tax implications
Plan withdrawals to stay within the basic-rate tax band if possible. Combine ISAs for tax-free top-ups.
✅ Step 6: Revisit every few years
Your needs change. You can always buy another annuity later — but once you’ve bought one, you can’t go back.
✅ Step 7: Get guidance
Book a free Pension Wise appointment or consult an independent financial adviser. The stakes are high — a bit of advice here pays for itself many times over.
Worked example
Caroline, 64, has a £300,000 pension pot.
She needs £20,000 a year to live comfortably. Her State Pension provides £11,500, leaving an £8,500 gap.
She decides to:
- Buy a £150,000 annuity paying £9,000 a year (covers her essential bills).
- Keep £150,000 in drawdown for flexibility and potential growth.
This way, her core income is guaranteed for life, and she still has access to investments for holidays, gifts, or emergencies.
When she turns 75, she can choose to buy another small annuity for extra security — or continue drawing flexibly.
Bottom line
There’s no one-size-fits-all answer.
- Annuities offer peace of mind and simplicity.
- Drawdown offers freedom and growth potential.
For many retirees, the sweet spot is a blend:
Secure the basics with an annuity.
Keep the rest invested for flexibility and legacy.
Whatever you choose, shop around, understand the trade-offs, and get advice before locking in.
You’ve worked a lifetime for this pot — now it’s about making it work for you, safely and smartly.
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