For most people the pension question that matters is not how to save, but how to turn what they have saved into an income that lasts. The two main routes - flexi-access drawdown and a lifetime annuity - work in fundamentally different ways, and for several years the decision has been livelier than it used to be: annuity rates recovered strongly with higher interest rates, making the comparison genuinely two-sided again.
Drawdown vs annuity at a glance
| Drawdown | Lifetime annuity | |
|---|---|---|
| Income | Flexible: you choose how much and when | Fixed and guaranteed for life |
| Investment risk | Stays with you | Passes to the insurer |
| Running out | Possible if withdrawals are too high or markets fall | Not possible; it pays for life |
| Changing your mind | You can buy an annuity later | Usually cannot be undone |
| On death | Remaining fund passes to beneficiaries | Depends on the options chosen at the start |
| Ongoing reviews | Needed, at least yearly | None needed once set up |
Drawdown: keep it invested, draw what you need
In drawdown your pension stays invested and you take income from it as you choose. Its strengths are flexibility - vary income year to year, take more in early retirement, less later - and the potential for the fund to keep growing. Anything unused can pass to your beneficiaries.
The weaknesses are the mirror image. Your income is not guaranteed: markets fall as well as rise, and taking a fixed income from a falling fund (so-called sequencing risk) can deplete it faster than expected. Drawdown also requires ongoing decisions - investment choice, withdrawal rate, tax management - for the rest of your life, or an adviser to make them with you.
Annuity: hand over capital, receive certainty
An annuity is insurance in the opposite direction: you give an insurer a lump sum and it pays you a guaranteed income for life, however long that turns out to be. Options can include inflation-linking, a spouse’s pension, and guarantee periods. Enhanced annuities pay more if your health or lifestyle suggests a shorter life expectancy - always disclose medical conditions when getting quotes.
The certainty comes at the price of flexibility: the decision is generally irreversible, the income usually dies with you (unless you have built in protections), and fixed incomes lose buying power to inflation unless you pay for escalation.
It is rarely all-or-nothing
In practice, many good retirement plans blend the two: an annuity (alongside the State Pension) covering essential outgoings - the bills that must be paid in any market - with drawdown providing the flexible layer for travel, family and the unexpected. The right mix depends on your health, other assets, attitude to risk, and what you want to leave behind. The tax treatment of each route also differs, and from 6 April 2027 most unused pension funds will fall within inheritance tax, under the Finance Act 2026 - see our guide to the pension inheritance tax changes - which is shifting how some people sequence their withdrawals.
Annuity options that change the income
An annuity is not one product. The choices you make at the start shape the income for the rest of your life, and every extra feature lowers the starting income:
- Level or increasing. A level income starts higher but loses buying power to inflation; an increasing income starts lower and rises each year.
- Single or joint life. A joint life annuity keeps paying a partner after you die, usually at a reduced rate you choose.
- Guarantee period or value protection. These return some value to your beneficiaries if you die soon after buying.
- Enhanced terms. Health conditions and some lifestyle factors can mean a higher income, so it pays to disclose them fully and compare insurers.
Tax when you take your pension
With either route you can usually take up to 25% of the pension tax free, within an overall limit, and the rest is taxed as income in the year you receive it. Whether to take the tax-free cash straight away is a separate decision; our guide to taking your tax-free cash covers it.
One difference catches people out. Taking taxable income from drawdown triggers the money purchase annual allowance, a much lower limit on future contributions to defined contribution pensions. Buying a standard lifetime annuity does not. If you are still working and paying into a pension, that can affect which route, or which order, makes sense.
What happens when you die
In drawdown, whatever is left in the fund can pass to the people you nominate. With an annuity, what your family receives depends on the options you chose at the start: a joint life income, a guarantee period, value protection, or nothing at all. From April 2027 most unused pension funds are expected to count towards your estate for inheritance tax, and beneficiaries may also pay income tax on what they draw, depending on your age at death. Our guide to the April 2027 pension inheritance tax changes explains how the two interact.
If you also have a defined benefit pension
A final salary or other defined benefit pension already pays a guaranteed income for life, much like an annuity. Combined with the State Pension, it may already cover your essential spending, which can make the flexibility of drawdown more attractive for your other pots. We plan around a defined benefit pension rather than transfer it, and look at how your other savings work alongside it.
To see whether your pensions are on track for the income you want, try our pension shortfall calculator.
Questions to settle before deciding
- What income do I need for essentials, and is it covered by guaranteed sources?
- How would I cope - financially and emotionally - with a 20% market fall early in retirement?
- Does my health history suggest an enhanced annuity is worth quoting?
- What do I want to happen to remaining funds when I die?
This is one of the most consequential and least reversible decisions in personal finance, and it is exactly the kind of decision regulated advice exists for. Explore your options with our retirement planning service, try the pension shortfall calculator, or book a free initial call.
The value of pension investments can fall as well as rise, and pension and tax rules can change. This article is general information, not personal advice.
Important information
The information on this page is for information purposes only and does not constitute individual financial advice.
The value of investments may fall as well as rise. You may get back less than you originally invested.
Pensions are a long-term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change; therefore, the tax treatment of pension benefits can and may change in the future.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION ADVICE.
About this article
All details are correct at the time of writing (see the date at the top of this article). Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on individual circumstances.
The value of investments can go down as well as up, and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
