Should I choose pension drawdown or an annuity when I retire?

Full answer

When you access a defined contribution pension from age 55 (57 from 2028), the two main income options are flexi-access drawdown and a lifetime annuity. Usually you can first take up to 25% of the pot as a tax-free lump sum, with the rest providing taxable income. Drawdown leaves the remaining fund invested and you draw income as needed. It offers flexibility and the potential for growth, and any unused fund can pass to beneficiaries, but you carry investment risk and the risk of running out if you withdraw too fast. An annuity converts the fund into a guaranteed income for life, removing those risks but typically with less flexibility and nothing left to pass on under a basic single-life annuity. Worked example: a GBP 200,000 pot. You take GBP 50,000 tax free (25%). With the remaining GBP 150,000 in drawdown you might draw GBP 6,000 a year and keep the fund invested. Alternatively, that GBP 150,000 might buy an annuity paying a fixed amount for life. All income drawn or paid is taxable: added to other income such as the full new State Pension of GBP 12,548 a year, it uses your Personal Allowance of GBP 12,570 and is then taxed at 20% and above. Many people blend the two, securing essential spending with an annuity and keeping the rest flexible in drawdown. Taking large taxable lump sums in one year can push you into the 40% band above GBP 50,270. Use the pension calculator to model withdrawals and the income-tax calculator to check the tax on income drawn. Free guidance is available via Pension Wise; for the rules see gov.uk.

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