Annuity vs drawdown — the UK comparison.
Two ways to turn a pension pot into retirement income. One guarantees a fixed amount for life. The other keeps your money invested and lets you choose how much to take. Neither is inherently better — the right answer depends on circumstances that vary from person to person.
- ▸An annuity converts part or all of a pension pot into a guaranteed income for life. Once purchased, the decision is irreversible — the capital is gone.
- ▸Drawdown keeps the pot invested and allows flexible withdrawals, but the income is not guaranteed and the pot can run out if markets fall or withdrawals are too high.
- ▸Most people retiring today choose drawdown, but annuities still have a clear role — particularly for covering essential spending or for those in poor health who qualify for enhanced rates.
- ▸Partial annuitisation — buying an annuity with part of the pot and drawing down the rest — is an increasingly common middle ground.
What annuities guarantee (and what they don't)
An annuity is a contract with an insurance company. You hand over a lump sum, and in return they pay you a fixed income — typically monthly — for the rest of your life, however long that turns out to be.
The guarantee is real. If you buy a level annuity at 65 and live to 100, the insurer keeps paying. That longevity insurance is the core value proposition: you cannot outlive the income.
What annuities do not guarantee is value for money. If you die at 68, the insurer keeps the bulk of the capital (unless you bought a guarantee period or value protection — both of which reduce the rate). Annuity rates also vary significantly between providers, which is why shopping around via the open market option matters. The difference between the best and worst quote on the same pot can be 15–20%.
Other limitations: a standard level annuity does not rise with inflation. A £10,000 annual income today buys noticeably less in 20 years. Inflation-linked annuities exist but start at a much lower rate — often 30–40% lower. And once purchased, you cannot change your mind. The capital is irrevocably transferred to the insurer.
You can model different annuity scenarios with the annuity calculator.
What drawdown offers (and risks)
Drawdown — formally called flexi-access drawdown since the 2015 pension freedoms — leaves your pot invested while you withdraw income from it. There is no upper or lower limit on withdrawals (though taking too much too fast is the primary risk).
The advantages are flexibility and control. You choose how much to take and when. If markets perform well, the pot may grow even as you draw from it, potentially leaving more for dependants. And unlike an annuity, the remaining pot forms part of your estate and can be passed on — often tax-free if you die before 75.
The risks are the mirror image. Markets can fall, especially early in retirement — a pattern known as sequence of returns risk. If you withdraw at a fixed rate through a downturn, the pot depletes faster than projected. There is no backstop: if the money runs out, it's gone. Drawdown also requires ongoing investment decisions (or delegating those decisions to a platform or adviser), which introduces complexity and cost.
The pension drawdown calculator lets you model how long a pot might last at different withdrawal rates.
The key variables: health, other income, dependants
The annuity-vs-drawdown question is not abstract. It turns on a few concrete personal factors:
Health. Someone with a serious health condition or shortened life expectancy may qualify for an enhanced annuity, which pays a higher rate. Conversely, someone in excellent health may prefer drawdown, expecting a long retirement that justifies keeping the pot invested.
Other guaranteed income. If the state pension, a defined benefit pension, or other guaranteed sources already cover essential living costs, the case for an annuity is weaker — drawdown can sit on top as a flexible supplement. If the pension pot is the only income source, the guaranteed floor an annuity provides becomes more valuable.
Dependants. Drawdown is generally more efficient for passing wealth to a spouse or children, since the remaining pot can be inherited. Annuities can include a spouse's pension (at a reduced rate), but are less flexible for inheritance purposes. See the pension inheritance guide for the full picture.
Risk tolerance. Some people sleep better knowing a fixed amount arrives every month. Others are comfortable with market fluctuations. This is not a trivial consideration — behavioural risk (panic-selling in a downturn) is as real as market risk.
The middle ground: partial annuitisation
It does not have to be all-or-nothing. An increasingly common approach is to annuitise enough of the pot to cover essential fixed costs (housing, bills, food) and keep the rest in drawdown for discretionary spending.
This hybrid approach captures the annuity's longevity guarantee where it matters most while preserving the flexibility and growth potential of drawdown for everything else. It also reduces the pressure on the drawdown portion — if essential costs are covered, you can afford to ride out a market downturn without being forced to sell at a loss.
The trade-off is complexity: two structures to manage instead of one, and the irreversibility of the annuity portion still applies.
The trend: why drawdown now dominates
Before the 2015 pension freedoms, most people with defined contribution pensions bought an annuity — it was effectively the default. Since 2015, drawdown has overtaken annuities as the most common choice. FCA data shows that roughly 35% of pension pots accessed in 2023/24 entered drawdown, versus around 10% used to purchase an annuity.
Several factors explain the shift: record-low annuity rates through the 2010s made annuities look poor value; the freedoms gave people choice where none existed before; and the inheritance advantages of drawdown appeal to those thinking about estate planning.
Annuity rates have improved significantly since 2022 as interest rates rose. A 65-year-old can now get a level annuity rate of roughly 7% (meaning £7,000 per year per £100,000 of pot), compared with under 5% in 2021. Whether that shifts the balance back towards annuities remains to be seen.
- •Buying an annuity is an irreversible decision. Once the capital is transferred to an insurer, it cannot be recovered.
- •Drawdown income is not guaranteed. The pot can be depleted by poor market returns, excessive withdrawals, or both.
- •The right choice depends on individual circumstances including health, other income sources, dependants, and risk tolerance.
- •This comparison covers the main trade-offs but does not constitute a personal recommendation for either option.
- ▸Since the 2015 pension freedoms, drawdown has become the most common way to access defined contribution pensions, with roughly 35% of pots entering drawdown versus around 10% purchasing an annuity in 2023/24. [FCA]
- ▸Annuity rates for a 65-year-old purchasing a level, single-life annuity have risen from under 5% in 2021 to approximately 7% in early 2026, reflecting higher gilt yields. [MoneyHelper]
- ▸The open market option allows anyone buying an annuity to shop around — the difference between the best and worst quote on the same pot can be 15–20%. [FCA]
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.