Annuity vs. Drawdown

Explore the key differences between annuities and drawdown to help you decide what’s right for your retirement.

As retirement approaches, one of the biggest decisions you’ll make is how to turn your pension pot into income. You can buy an annuity, opt for drawdown, or combine the two.

In this guide, we’ll compare annuity and drawdown, exploring the pros and cons of each, and offer tips about how to choose the right option for you.

What’s the difference between annuity and drawdown?

An annuity and drawdown are two different ways of getting income from your pension pot during retirement.

An annuity is a financial product that you buy with some or all of your pension pot. It provides you with a regular, fixed income for the rest of your life.

Drawdown is a way of taking money out of your pension pot, as and when you want, while leaving the rest invested.

Put simply, an annuity gives you guaranteed retirement income, while drawdown gives you flexible retirement income. Remember: you don’t have to choose one or the other, you can split your pot between the two.

It’s important to remember that some choices, such as buying an annuity, cannot usually be changed later. Make sure you understand all risks and guarantees before deciding.

Similarities between annuity and drawdown

There are a few things that apply to both annuity and drawdown:

• Age: You must be 55 years old to buy an annuity or start drawing down money from your pension pot. (This is set to rise to 57 in April 2028). 
• Tax-free lump sum: However you take money from your pension, you can take 25% of it tax-free.
• Tax: The income you get from your pension is taxable.
• State benefits: The income you receive from your pension is taxable and will be added to your total income for the tax year, which may affect the tax band you fall into.

Annuity pros and cons

Drawdown pros and cons

Choosing the right option for you 

Now that we’ve covered the basics of annuity and drawdown, you can start to think about which is right for you. Do you want the certainty that comes with an annuity, or the flexibility of drawdown? Or would a combination of the two work best for you?

Here are a few things to consider when making your decision:

• Health and family history: If long life runs in your family, guaranteed income could be particularly valuable throughout your retirement. 
• Other income sources: State pension, other pensions or savings will affect how much certainty or flexibility you need from this pot. 
• Comfort with risk: Some people sleep soundly with investments that fluctuate, while others prefer knowing exactly what's coming in each month. 
• Spending patterns: Consider whether your expenses will stay fairly steady or if you'll need larger sums for travel, home improvements or helping family. 
• Loved ones: Leaving something behind might be important to you, or you may prefer to maximise your income. 
• Financial confidence: You might be happy managing investments and making withdrawal decisions, or want a hands-off approach.

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