Comparison · Retirement 2025
Annuity vs Drawdown
At retirement, your defined contribution pension can buy a guaranteed income for life (annuity) or stay invested with flexible withdrawals (drawdown). The right choice depends on longevity, attitude to risk and what you want to leave behind.
TL;DR — 30 Second Answer
- • Want security: Annuity — guaranteed lifelong income
- • Want flexibility & growth: Drawdown — keep invested
- • Want to leave inheritance: Drawdown — pot passes to beneficiaries
- • Best for most: Hybrid — small annuity for essentials, drawdown for the rest
£200,000 Pot at Age 65 — Compared
| Metric | Annuity (level) | Drawdown (4% rule) |
|---|---|---|
| Initial income/year | ~£10,000 | ~£8,000 |
| Income inflation | No (level) or RPI-linked option | Manage yourself |
| Pot at age 84 (avg LE) | £0 (dies with you) | ~£200,000+ (likely) |
| Longevity risk | None — provider bears it | You bear it |
| Investment risk | None — fixed | You bear it |
| Inheritance (to family) | Usually none | Pot passes to beneficiaries |
| Tax-free lump sum | 25% (£50k) before annuity | 25% (£50k) or phased |
Annuity rate ~5% for healthy 65-year-old male, level, single life. Higher for older/joint/enhanced (medical conditions).
Annuity — Pros & Cons
- • Guaranteed income for life
- • No investment decisions needed
- • Live to 100+ = great deal
- • Enhanced rates for smokers/medical conditions
- • Inflation-linked option available
- • Irreversible — locked in for life
- • Die early = provider keeps money
- • No flexibility for big expenses
- • RPI-linked annuity starts ~40% lower
- • Nothing left to inherit (unless joint/guarantee)
Drawdown — Pros & Cons
- • Full flexibility — vary withdrawals year to year
- • Pot stays invested — can grow
- • Inheritance: passes IHT-free to 2027
- • Tax planning: control income year by year
- • Can buy annuity later if rates improve
- • Sequence-of-returns risk (market crash early)
- • Could outlive pot if withdraw too fast
- • Need to manage investments (or pay adviser)
- • Triggers MPAA £10k once you withdraw beyond 25%
- • April 2027: pot becomes part of IHT estate
Hybrid Strategy (Recommended for Most)
Cover essential bills (food, energy, Council Tax) with State Pension + a small annuity — this gives a guaranteed «floor» you can never outlive. Then drawdown the rest flexibly for holidays, family gifts, big purchases. Example: State Pension £11,973 + £100k annuity = £16k floor; drawdown remaining £150k pot at 4% = £6k flexible income. Total £22k secure + flexibility.