Annuity vs Drawdown on a £100,000 Pension Pot: A 2026/27 Case Study
A detailed worked comparison of buying an annuity versus using flexible drawdown on a £100,000 pension pot at retirement, covering income, tax and risk for 2026/27.
Setting up the comparison
A £100,000 pension pot at retirement is a common enough scenario to make a genuinely useful case study. The first decision — take some tax-free cash — is usually straightforward: up to 25% (£25,000 here) can normally be taken tax-free, subject to the £268,275 lump sum allowance, which a £100,000 pot comes nowhere near. The harder decision is what to do with the remaining £75,000: buy a guaranteed income (an annuity), draw it down flexibly while it stays invested, or some blend of the two.
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Open Pension calculatorOption 1: annuity
An annuity converts the £75,000 into a guaranteed income for life, with the rate depending on annuity market conditions, your age, health (enhanced annuities pay more for certain health conditions or lifestyle factors that reduce life expectancy), and any additional features chosen.
Illustrative example: a level (non-inflation-linked), single-life annuity for a 66-year-old in reasonable health might currently provide in the region of £5,000–£5,500 a year — a genuine, guaranteed floor that cannot fall even if markets crash or the retiree lives to 100. Choosing inflation-linking would reduce the starting income but protect its real value over time; choosing a joint-life or guarantee-period option would also reduce the starting income but protect a spouse or estate.
Option 2: drawdown
The £75,000 stays invested, and the retiree withdraws income as needed, subject to it lasting through retirement. Using a common starting guideline of roughly 3.5-4% of the initial pot per year, adjusted for inflation, that might mean an initial income of around £2,625–£3,000 a year — noticeably lower than the annuity's guaranteed figure in this example, but with the potential for the underlying pot (and therefore future income) to grow if investment returns are strong, and the flexibility to vary withdrawals year to year.
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Open SIPP calculatorThe real risk with drawdown is sequencing: a poor run of investment returns in the early years of retirement, combined with ongoing withdrawals, can permanently damage the pot's ability to recover, even if markets later improve — a risk an annuity simply does not carry, because the income is fixed regardless of what happens to markets afterward.
A blended approach
Many retirees split the difference: use part of the £75,000 to buy a smaller annuity covering essential fixed costs (rent or mortgage, utilities, food), providing a guaranteed floor income that cannot be eroded by markets, while keeping the remainder in drawdown for flexibility, discretionary spending, and potential growth. This structure directly addresses the main weakness of each option alone — an annuity's total inflexibility and a pure drawdown's market risk.
Bottom line
On a £100,000 pension pot, the £25,000 tax-free cash decision is usually easy; the £75,000 income decision is not. An annuity offers certainty at the cost of flexibility and growth potential; drawdown offers flexibility and growth potential at the cost of certainty and genuine sequencing risk. A blended approach — a smaller annuity to cover essentials, drawdown for the rest — is a reasonable middle path many retirees choose rather than committing entirely to one option.
Model different pension income scenarios with the pension calculator and SIPP calculator.
Sources
- MoneyHelper: Annuity vs drawdown guidance
- GOV.UK: Pension Wise free guidance service
- GOV.UK: Pension tax-free lump sum rules
Frequently asked questions
How much tax-free cash can I take from a £100,000 pension pot?
Under current rules you can normally take up to 25% of your pension pot tax-free, subject to the £268,275 lump sum allowance, so on a £100,000 pot that is typically £25,000 tax-free, leaving £75,000 to provide an income via annuity or drawdown.
How much annual income might a £75,000 annuity purchase provide?
This depends heavily on annuity rates at the time, your age and health, and whether you choose features like inflation-linking or a spouse's pension — as an illustration, a level, single-life annuity for a 66-year-old might currently provide somewhere in the region of £5,000–£5,500 a year, though actual quotes vary and should always be checked directly.
What is the main risk of drawdown compared to an annuity?
Drawdown leaves your remaining pot invested and exposed to market performance, meaning your income is not guaranteed and there is a genuine risk of running out of money if withdrawals are too high, investment returns are poor, or you live longer than expected — an annuity removes this risk entirely by guaranteeing income for life.
What withdrawal rate is often used as a starting point for drawdown sustainability?
A commonly cited starting point is around 3.5-4% of the initial pot value per year, adjusted for inflation, though the genuinely sustainable rate depends on investment returns, life expectancy, and how much flexibility you have to reduce withdrawals in a poor market year.
Can I combine an annuity and drawdown with the same pension pot?
Yes — many retirees use a blended approach, annuitising part of the pot to guarantee a baseline income covering essential costs, while keeping the rest in drawdown for flexibility and growth potential, rather than choosing one option exclusively.
Does drawdown income count as taxable income?
Yes — both annuity income and drawdown withdrawals (beyond the tax-free element already taken) are taxed as income in the year received, added to any other income and taxed at your marginal rate through PAYE.
What happens to a drawdown pot if I die before spending it all?
Remaining funds in drawdown can generally be passed to beneficiaries, historically tax-free if death occurred before age 75 and taxed at the beneficiary's marginal rate if after, though pension death benefit tax treatment is subject to ongoing reform and should be checked against current rules.
What happens to annuity income if I die shortly after buying it?
With a basic single-life annuity and no guarantee period, payments simply stop on death, meaning the remaining value is lost to your estate — options like a guarantee period or joint-life annuity protect against this but reduce the income paid during your lifetime.
Does the Money Purchase Annual Allowance affect someone who starts drawdown?
Yes — once you take a taxable income (not just tax-free cash) from a drawdown pot, your future pension annual allowance for further contributions typically drops to £10,000 (the Money Purchase Annual Allowance), which matters if you plan to continue working and contributing to a pension after starting drawdown.
Where can I model my own pension income options at retirement?
The pension calculator and SIPP calculator can help model projected pot values and income scenarios, though a specific annuity quote or drawdown income projection should always be obtained directly from a provider or adviser before making a final decision.
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