Answers · UK 2025/26
Should I choose an annuity or drawdown for my pension?
An annuity provides a guaranteed income for life (or a fixed term), removing investment and longevity risk but generally offering less flexibility and, in most cases, no remaining pot for beneficiaries once you die. Drawdown keeps your pension invested and gives you flexible control over withdrawals, but carries investment risk and the possibility of running out of money if withdrawals are too high or investment returns are poor.
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The choice between an annuity and drawdown is one of the most consequential pension decisions most people make, and increasingly people use a combination of both rather than choosing one exclusively, since pension freedoms allow considerable flexibility in how retirement income is structured. **How annuities work** An annuity is essentially an insurance product -- you exchange some or all of your pension pot for a guaranteed income, paid for the rest of your life (a lifetime annuity) or for a fixed number of years (a fixed-term annuity), with the rate offered depending on factors including your age, health, lifestyle, and prevailing interest rates and gilt yields at the time you buy it. Once purchased, a standard lifetime annuity provides certainty -- you cannot outlive the income, regardless of how long you live or how investment markets perform, but in most cases there is no remaining capital for your beneficiaries once you die, unless you specifically choose (and pay for) options such as a guarantee period or spouse's pension. **How drawdown works** Drawdown keeps your pension pot invested (commonly in a mix of funds similar to how it was invested before retirement) while you withdraw an income from it, with the flexibility to vary how much you take, when, and to leave the remaining pot to be passed on to beneficiaries relatively tax-efficiently on your death (particularly if you die before age 75, and subject to the pension Inheritance Tax reforms taking effect from April 2027). This flexibility comes with two key risks: investment risk (your pot could fall in value, especially if withdrawals continue during a market downturn) and longevity risk (you could live longer than your pot lasts if withdrawals are set too high). **Annuity rates and why they have varied significantly over time** Annuity rates are heavily influenced by long-term gilt yields and interest rates -- when these are higher, annuities generally offer better guaranteed income for a given pot size, while in low-interest-rate environments annuity income can look comparatively unattractive, which was a major factor in drawdown's rising popularity following the pension freedoms introduced in 2015. Checking current annuity rates specifically at the time you are considering your options is essential, since they change regularly. **Shopping around and the Open Market Option** You are not obliged to buy an annuity from your existing pension provider -- using the Open Market Option to shop around across different annuity providers, and disclosing health conditions and lifestyle factors that could qualify you for an enhanced annuity (a higher rate reflecting a potentially shorter life expectancy), can make a very significant difference to the income you secure for the same pot size. **Combining both approaches** Many retirees choose a blended approach -- for example, using part of their pension pot to buy an annuity covering essential living costs (providing a guaranteed income floor regardless of market performance), while keeping the remainder in drawdown for flexibility, growth potential, and the ability to pass unused funds to beneficiaries. **Worked example** Someone with a £300,000 pension pot at retirement might use £150,000 to buy a lifetime annuity, securing a guaranteed income for life to cover their essential bills, while keeping the remaining £150,000 in drawdown, giving them flexibility to take variable additional income, respond to changing needs, and potentially leave remaining drawdown funds to their children, while the annuity portion guarantees they can never run out of income entirely regardless of how long they live or how investment markets perform. **Practical tip** Get a free Pension Wise appointment (available to everyone with a defined contribution pension from age 50) to talk through your options impartially, and consider taking regulated financial advice, particularly for larger pension pots, since the annuity versus drawdown decision (or the right blend of both) depends heavily on your personal health, other income sources, risk tolerance, and wishes for what happens to your pension after you die.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.