An annuity is an insurance product that converts your pension pot into a guaranteed income for life (or a fixed term). You give your pension pot to an insurer and receive regular payments — monthly, quarterly or annually — for as long as you live (with a lifetime annuity) or for a set period.

What is income drawdown?

Income drawdown (or flexi-access drawdown) keeps your pension pot invested and lets you withdraw income flexibly. Your pot remains invested and can grow, but can also fall in value. There is no guaranteed income and the pot can run out if withdrawals are too high or investment returns are poor.

What annuity rate can a 65-year-old expect in 2025/26?

Annuity rates fluctuate with interest rates. In 2025/26 a typical 65-year-old with a standard single-life level annuity might expect rates in the range of 6% to 7% per year. Enhanced annuity rates for people with health conditions can be significantly higher.

What is the break-even point between annuity and drawdown?

The break-even point is the year at which cumulative annuity income exceeds cumulative drawdown withdrawals. If you live beyond the break-even age, the annuity has provided better total value. Before break-even, drawdown has delivered more cumulative cash.

Can I take the 25% tax-free lump sum before buying an annuity?

Yes. You can take up to 25% of your pension pot (up to the £268,275 lifetime limit) as a tax-free pension commencement lump sum before using the remaining 75% to buy an annuity. This reduces the annuity income proportionally.

Is annuity income taxed?

Yes. Annuity income (excluding the notional tax-free portion) is taxed as pension income at your marginal rate. The 25% tax-free portion is typically built into the annuity calculation by taking PCLS first; the annuity itself is then fully taxable.

What happens to an annuity when I die?

A basic single-life annuity pays nothing on death. You can buy a joint-life annuity (pays to a spouse/partner), a guaranteed period annuity (pays for a minimum number of years even if you die), or a value-protected annuity at extra cost. Each option reduces the initial income level.

What happens to a drawdown pot when I die?

Drawdown pots can be passed on to beneficiaries. If you die before age 75, the remaining pot is usually inherited tax-free. If you die after 75, beneficiaries pay income tax on withdrawals at their marginal rate. Drawdown funds are outside your estate for inheritance tax purposes.

What is sequence of returns risk in drawdown?

Sequence of returns risk means poor investment returns in the early years of drawdown, combined with withdrawals, can permanently deplete a pot even if average returns recover later. This is a key risk difference compared to annuities, which provide guaranteed income regardless of investment performance.

How does inflation affect an annuity?

A level annuity pays the same amount every year and loses real value to inflation. An inflation-linked (index-linked) annuity increases payments in line with RPI or CPI but starts at a significantly lower initial income. You need to live many years for an index-linked annuity to pay more total income.

Do I need financial advice to buy an annuity?

Financial advice is not legally required to buy an annuity (unlike transferring a defined benefit pension over £30,000). However, it is strongly recommended given the irreversible nature of most annuity purchases. Shopping around using the open market option can also significantly increase income.

What is the open market option for annuities?

The open market option means you do not have to buy an annuity from your existing pension provider. You can shop around all UK annuity providers for the best rate. Rates vary significantly between providers and searching via a broker or comparison service is highly recommended.

How is the drawdown pot taxed?

Withdrawals from a drawdown pension are taxed as pension income. 25% of each withdrawal can be taken tax-free (up to the £268,275 lifetime limit) with the remaining 75% taxed at your marginal income tax rate, unless you have already taken your full tax-free entitlement as a lump sum.

What investment return should I assume for drawdown projections?

Drawdown projections are illustrative only. Common assumptions range from 3% to 7% per year depending on risk level. A balanced portfolio might use 5% as a central assumption. Remember that actual returns will vary and can be negative in poor years.

What is the sustainable withdrawal rate for pension drawdown?

The 4% rule (originating from US research) suggests withdrawing 4% of your pot per year has historically provided sustainable income for 30 years in most market conditions. In the UK context with lower expected returns, 3-3.5% is sometimes used as a more cautious figure.

Can I switch from drawdown back to an annuity?

Yes. You can use your remaining drawdown pot to buy an annuity at any time. Many people enter drawdown early in retirement for flexibility, then convert to an annuity later (e.g. at age 75 or 80) when guaranteed income becomes more important.

What is a with-profits annuity?

A with-profits annuity offers variable income linked to investment performance of the insurance company's with-profits fund. Payments can increase or decrease each year. It combines some investment upside with an annuity structure, but income guarantees are weaker than a conventional fixed annuity.

How do enhanced annuities work?

Enhanced (or impaired life) annuities pay higher income to people with serious health conditions or lifestyle factors such as smoking, heart disease, diabetes, or cancer. Providers assess your health and offer an enhanced rate. These can pay 20-50% more income than standard annuity rates.

What charges apply to income drawdown?

Drawdown pots typically incur ongoing fund management charges (typically 0.15% to 0.75% per year for investment funds) plus platform administration charges (typically 0.25% to 0.45% per year). These charges reduce pot growth and must be factored into any drawdown projection.

Is annuity or drawdown better for inheritance?

Drawdown is generally better for inheritance purposes. Unused drawdown funds can be passed to beneficiaries tax-efficiently. A standard annuity pays nothing on death (or a reduced joint-life income) and cannot be inherited as a pot.

What is longevity risk in retirement planning?

Longevity risk is the risk of outliving your savings. Annuities eliminate longevity risk because they pay for life regardless of how long you live. Drawdown carries longevity risk because withdrawing too much, poor returns, or simply living longer than expected can exhaust the pot.

Where can I get the best annuity quote in the UK?

Use the open market option to compare all UK providers via specialist annuity brokers or comparison services. The Money Helper (MoneyHelper.org.uk) provides guidance. Always get multiple quotes as rates differ significantly between providers, especially if you have health conditions.

Annuity vs Drawdown Calculator 2025/26

Q: Can I combine annuity and drawdown?

Yes. Many retirees use a hybrid approach — buying an annuity to cover essential expenditure (alongside State Pension) and keeping the remainder in drawdown for flexibility. This removes longevity risk from the core income while preserving growth potential.

Compare guaranteed annuity income against flexible income drawdown. See your 20-year projection, pot depletion age and the break-even year.

Annuity vs Drawdown Comparison

Pension pot size £

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Annuity rate % per year

Annual drawdown withdrawal £

Drawdown investment return % p.a.

Income tax band

Annuity vs Drawdown: Key Differences

Choosing between an annuity and income drawdown is one of the most important financial decisions you will make at retirement. There is no universally correct answer — the right choice depends on your health, other income, attitude to risk, family circumstances, and how much you value certainty versus flexibility.

Annuity: Security but Less Flexibility

An annuity converts your pension pot into a guaranteed income for life (or a fixed term). The rate offered depends primarily on your age, health, interest rates at purchase, and whether you want inflation protection or a joint-life option. Once purchased, most annuities are irrevocable — you cannot change your mind. Annuity rates improved significantly from 2022 onwards as interest rates rose, making them more competitive compared to drawdown than they were in the 2010s.

Drawdown: Flexibility but Investment Risk

Drawdown keeps your pension pot invested. You can take as much or as little income as you want (subject to minimum age rules) and adjust withdrawals as your needs change. The pot can grow if investments perform well, and any remaining funds can be passed to beneficiaries. However, poor investment returns, high withdrawals, or simply living longer than expected can exhaust the pot entirely — leaving you without private pension income in later life.

Hybrid Approaches

Many retirees combine the two approaches. Using an annuity to cover essential expenditure (alongside State Pension) and keeping the remainder in drawdown for flexibility can provide both security and growth potential. This strategy is particularly popular for larger pension pots where the 25% tax-free cash has already been taken.