Pension Drawdown vs Annuity: Which Is Right for You?

When you start taking a defined contribution pension, the biggest decision is how to turn the pot into income. Drawdown and annuities are close to opposites, and the right choice depends on what you value most. This guide is part of our complete guide to UK retirement rules.

01How do they compare at a glance?

02How does drawdown work?

With drawdown, you usually take some or all of your 25% tax-free cash, leave the rest invested, and draw a taxable income as and when you need it.

What is good about it

• You control your income and can turn it up or down as life changes.
• Your pot stays invested, so it can keep growing.
• Anything left when you die can be passed on.

What can go wrong

• Your pot is exposed to markets and can fall as well as rise.
• Falls early in retirement do the most damage, because you are selling investments at low prices to fund your income. This is called sequencing risk.
• Nothing is guaranteed. Draw too much, or live longer than you planned for, and the money can run out.

03How does an annuity work?

You hand over some or all of your pot to an insurer and receive a guaranteed income, typically for the rest of your life.

What is good about it

• The income is certain and does not depend on markets.
• It lasts as long as you do, however long that is.
• Rates are far higher than they were for most of the last decade.

As a snapshot, in autumn 2026 a healthy 65-year-old with £100,000 could get roughly £7,400 to £8,200 a year from a level, single-life annuity, depending on the provider and whether it includes a guarantee period. An annuity that rises each year with inflation started much lower, at roughly £5,000 to £6,000 a year. Rates change weekly, so treat these as a guide and compare live quotes before you decide.

What can go wrong

• It is normally irreversible.
• A basic single-life annuity pays nothing after you die.
• A level annuity loses buying power every year as prices rise.

Options that change the picture

• Joint-life: carries on paying a partner after you die. That continuing income does not count towards your estate for Inheritance Tax.
• Guarantee period: pays out for a minimum number of years even if you die early. From April 2027, payments made after your death count towards your estate for Inheritance Tax unless they go to your spouse or civil partner.
• Inflation-linked: starts lower but rises each year.
• Enhanced: pays more if you have health conditions or smoke. Always disclose your health, because many people qualify without realising.

Each protective option reduces the starting income. And always compare the whole market. You do not have to buy from your existing pension provider, and the gap between the best and worst rates can be large.

04Why do many people use both?

It is rarely all or nothing. A popular approach is to work out your essential spending, such as housing, energy, food and council tax, and make sure guaranteed income covers it. Your State Pension and any defined benefit pension count towards that. If there is a shortfall, an annuity could fill it. The rest of your pot stays in drawdown for flexible spending.

You could also phase it. Some people start in drawdown and buy an annuity in their seventies, when rates for their age are higher and they have less appetite for managing investments.

Has the Inheritance Tax change shifted the balance?

Somewhat. One of drawdown's big attractions was that unused money could be passed on free of Inheritance Tax. For deaths on or after 6th April 2027, most unused pension money will count towards your estate. That massively weakens the case for leaving a pension untouched purely as an inheritance, and makes spending it, or securing an income with it, far more attractive than before.

It matters for annuities too. If you buy an annuity with a guarantee period or value protection to look after your family, any payments made after your death will count towards your estate from 6th April 2027, unless they go to your spouse or civil partner. A joint-life annuity, where income continues to your partner, is not counted. If protecting someone else is part of the reason for buying an annuity, how you set it up now affects the Inheritance Tax position as well as the income.

05How is each taxed?

The same way. Beyond your tax-free cash, drawdown income and annuity income are both taxed as income. The difference is control: with drawdown you choose how much taxable income to take each year, which makes it easier to stay within a tax band. See income tax in retirement. Remember that taking taxable drawdown income triggers the Money Purchase Annual Allowance. Buying a standard lifetime annuity does not.

06Who does each tend to suit?

If you choose drawdown, charges matter, because you may be paying them for 30 years. We compare providers on fees, investment options and drawdown features in our pension reviews.

07Frequently asked questions

Can I have both drawdown and an annuity?

Yes. You can use part of your pot to buy an annuity and keep the rest in drawdown, and you can move from drawdown to an annuity later.

Can I cancel an annuity?

There is usually a short cooling-off period, typically 30 days. After that it is normally permanent.

Is drawdown riskier than an annuity?

In investment terms, yes. But an annuity has its own risks: inflation eroding a level income, and dying early without having bought any protection.

How much can I safely take from drawdown?

There is no guaranteed safe figure. It depends on your investments, charges, age and how long you live. A common starting point for discussion is around 4% a year, but it should be reviewed regularly.

Do I have to decide straight away?

No. You can leave your pension invested and decide later. Pension Wise offers a free guidance appointment if you are 50 or over.

08Sources and further reading

• MoneyHelper: Compare annuities and drawdown options
• MoneyHelper: Pension Wise
• FCA: Retirement income data
• Retirement Line: annuity rate tables

Important: This guide is financial education, not regulated financial advice or a personal recommendation. It reflects the rules for the 2026/27 UK tax year as at October 2026. Tax rules change, and how they apply depends on your circumstances. Whether drawdown, an annuity or a blend suits you depends on your health, other income and attitude to risk. If you are unsure, speak to an FCA-regulated financial adviser. You can also get free, impartial guidance from MoneyHelper, and from Pension Wise if you are 50 or over.