By Giliker Flynn – Family-run independent financial advisers, helping families plan secure and flexible retirements.
Why This Decision Matters
When you retire, you’ll usually have several options for how to access your pension. For defined contribution pensions, the two most common are:
Annuity – exchanging some or all of your pension pot for a guaranteed income for life (or a fixed period).
Drawdown – keeping your pension invested and withdrawing income as and when you need it.
Both options can work well — but they suit different people and different goals. Choosing the right one involves balancing security, flexibility, longevity, tax, and inheritance considerations.
How Annuities Work in the UK
An annuity is essentially an insurance contract between you and a provider. You give them a lump sum from your pension pot, and in return they pay you a regular income for life or for a set number of years.
Key features:
Guaranteed income — You’ll receive a fixed or inflation-linked amount for as long as the contract lasts.
No investment risk — The provider carries the risk of paying you for life.
Options to add benefits — e.g. inflation increases, joint life cover, or guarantee periods.
Irreversible decision — Once you buy an annuity, you usually can’t change your mind or access the capital.
Annuities were once the default choice for UK retirees, but became less popular after 2015’s pension freedoms. However, with interest rates rising, they’re now making a comeback.
Types of Annuities
Lifetime annuity – pays a guaranteed income for life.
Fixed-term annuity – pays a guaranteed income for a set period, after which there may be a residual amount.
Level annuity – pays the same amount each year.
Escalating annuity – increases annually, often linked to inflation.
Joint life annuity – continues paying an income to your spouse or partner after you die.
The higher the guarantees or inflation protection, the lower the starting income tends to be.
Factors That Affect Annuity Rates
Interest rates / gilt yields – Higher yields increase annuity rates.
Your age – Older retirees typically get higher income rates.
Health – Medical conditions can increase the rate (known as enhanced annuities).
Inflation options – Linking to inflation reduces the initial income but protects purchasing power.
Guarantee periods – Adding these lowers the initial payment slightly.
How Drawdown Works in the UK
With pension drawdown, your pot stays invested, and you choose how much income to take and when.
Key features:
Flexibility — You can vary income levels, pause withdrawals, or take lump sums.
Growth potential — Remaining invested means your pot may continue to grow.
Inheritance benefits — Remaining funds can often be passed to beneficiaries.
Market risk — Income isn’t guaranteed and could run out if not managed carefully.
Drawdown is more hands-on than an annuity — but for many people, that flexibility is extremely valuable.
Benefits of Drawdown
Control over income and investment strategy
Ability to adapt withdrawals to personal circumstances
Tax planning flexibility (e.g. managing income levels to stay within tax bands)
Remaining funds can be passed on, usually more efficiently than annuity income
Risks of Drawdown
Investment risk — market downturns can reduce your pot.
Longevity risk — you could outlive your money.
Behavioural risk — withdrawing too much too soon can deplete funds.
Higher responsibility — you (or your adviser) must actively manage it.
Drawdown works best for those who are comfortable with some investment exposure — or who work closely with a regulated financial adviser.
Comparing Annuity and Drawdown: Key Differences
FeatureAnnuityDrawdownIncome certaintyGuaranteedVariableInvestment riskNone (provider’s responsibility)Borne by youFlexibilityLimitedHighPotential for growthNoneYesInheritance optionsOften limitedUsually strongAbility to change strategyNone once setFlexibleInflation protectionOptional but costs extraCan be built into investment strategy
Tax Considerations
Both options sit within the UK pension tax regime.
25% tax-free lump sum available on crystallisation.
Remaining income taxed at your marginal rate.
Drawdown can be structured to keep you in lower tax bands.
Annuity income is fully taxable as pension income.
Any remaining drawdown funds can be passed tax-free on death before 75, or subject to income tax after 75 — but from 2027, they’ll also form part of the estate for IHT.
This IHT inclusion is a big change. For some, moving funds into annuity could actually reduce the size of their taxable estate. For others, leaving funds in drawdown may still make sense, depending on goals and health.
When an Annuity Might Be Right for You
Annuities can be a great fit if:
You want absolute certainty of income.
You have limited tolerance for investment risk.
Your priority is covering essential living costs for life.
You have few dependants or don’t prioritise leaving an inheritance.
You’re in poorer health and may qualify for an enhanced rate.
For example, using an annuity to cover core living expenses (e.g. bills, food, council tax) can give peace of mind and reduce pressure on other assets.
When Drawdown Might Be Better
Drawdown can work well if:
You want flexibility and control over your income.
You’re comfortable with investment risk or work with an adviser.
You have other sources of income (e.g. State Pension, rental, savings).
Leaving an inheritance matters to you.
You want to benefit from market growth.
Many of our clients use drawdown to supplement guaranteed income and maintain long-term flexibility.
The Rise of Blended Solutions
Increasingly, retirees are choosing a mix of annuity and drawdown — blending guaranteed income with flexible access.
For example:
Using part of your pot to buy an annuity to cover fixed costs (e.g. £15,000/year).
Leaving the rest invested in drawdown for discretionary spending, growth, or legacy.
This approach can offer the best of both worlds:
Certainty and security from the annuity
Flexibility and inheritance potential from drawdown
Greater resilience against inflation and market fluctuations
Market Conditions and Timing
The right choice can depend on when you retire.
When annuities are more attractive:
Interest rates and gilt yields are high (increasing income levels)
You value certainty over flexibility
You’re older or have health issues
When drawdown is more attractive:
You expect investment markets to offer decent returns
You want to keep control of capital
You’re younger and expect a long retirement horizon
As of 2025, annuity rates are higher than they’ve been in over a decade — which is why more retirees are reconsidering them.
Case Studies
Case Study 1 — Security First
Margaret, 67, has a £400,000 pension pot. She uses £250,000 to buy a joint life, inflation-linked annuity, giving her and her spouse £14,000 a year guaranteed for life.
The remaining £150,000 stays in drawdown as a flexible reserve.
Result: a secure income floor, reduced anxiety about markets, and flexibility for holidays, gifts, and emergencies.
Case Study 2 — Growth and Flexibility
Ian, 60, has £600,000 in a SIPP. He’s in good health and wants to retire gradually.
Leaves the entire pot in drawdown
Takes 4% withdrawals annually
Keeps 40% of the portfolio in defensive assets, 60% in growth investments
Plans to reassess at 70
Result: maximum control and growth potential, but with exposure to investment risk.
Case Study 3 — Blended Planning
Tom and Sarah, 65 and 63, have a £700,000 combined pension.
Use £350,000 to buy a level annuity to cover core household spending.
Leave the rest in drawdown for discretionary spending and legacy.
Draw at a cautious 3.5% rate.
Result: balanced security and flexibility, plus better tax planning options.
Practical Considerations Before Choosing
Understand your essential vs discretionary spending
Many people annuitise the amount needed to cover “must-haves” and draw down the rest.
Consider your health and longevity
Enhanced annuities can offer significantly higher rates if you have health conditions.
Get several annuity quotes
Rates vary between providers, and enhanced underwriting can make a big difference.
Stress-test your drawdown plan
Ensure your investment and withdrawal strategy can withstand market shocks and inflation.
Factor in inheritance goals and tax
How important is passing money on to family?
Review regularly
Retirement can last 30+ years. Your income strategy shouldn’t be static.
Common Mistakes to Avoid
Choosing all annuity or all drawdown without understanding the trade-offs.
Ignoring inflation protection — a fixed income might not stretch as far in 20 years.
Withdrawing too much in drawdown and depleting your pot.
Failing to update your plan as markets and personal circumstances change.
Not seeking regulated advice on complex annuity products.
Our View at Giliker Flynn
For most clients, the right solution isn’t “annuity vs drawdown”, but a blend of both.
An annuity can give stability and protect against longevity risk.
Drawdown can give flexibility and support inheritance goals.
Careful planning can also optimise your tax position, especially with the upcoming 2027 IHT reforms.
The key is to match your income strategy to your life — not the other way around.
Practical Next Steps
Review your retirement income needs in detail.
Get quotes for annuities (including enhanced options).
Model drawdown scenarios under different market conditions.
Consider a blended approach to balance security and flexibility.
Incorporate tax and estate planning into the decision.
Work with a regulated adviser to make sure your choice is robust and personal to you.
Conclusion
Whether you choose an annuity, drawdown, or a blend of both will shape your financial future for decades.
Annuities provide certainty but less flexibility.
Drawdown provides flexibility but requires good planning and discipline.
A blend can give you the best of both worlds.
The right decision depends on your income needs, health, family priorities, and risk appetite — and it’s one that should be made with care and professional guidance.
Important: Tax and pension rules can change, and their value depends on your circumstances. Always seek regulated financial advice before making decisions.
Giliker Flynn is a family-run, independent financial advice firm helping families across the UK design secure, flexible and tax-efficient retirement income strategies.