Drawdown vs annuity: which is right for me?

When you reach retirement, a defined contribution pension pot gives you a choice about how to turn it into an income. The two main routes are an annuity, where you swap some or all of your savings for regular guaranteed payments that last for the rest of your life, and drawdown, where you leave the fund invested and take money from it as you need it¹.

The difference between them is the difference between certainty and flexibility. An annuity pays a set income that cannot fall, but once bought it cannot be unwound: you cannot alter your level of income or switch to another provider². Drawdown has no limit on how much you can take out each year, but the income is not guaranteed and you can end up with nothing to support you³.

The choice is not permanent in one direction. You can move from drawdown into an annuity later, and you can take up to 25% of your pot as a tax-free lump sum first, though doing so reduces the amount left to buy a guaranteed income⁵.

What each option offers

An annuity is a form of investment where you pay a lump sum, usually to a pension company, in return for a guaranteed income, either for life or for a fixed number of years¹². What you get depends on your age and gender, the size of your pot, interest rates and sometimes your health¹³. If you are in poor health, smoke or are overweight, you are expected to live for a shorter time, so you are likely to get a higher income⁹. Enhanced annuities are designed for people with health conditions or lifestyle factors that could reduce life expectancy¹⁴.

Drawdown, also called income withdrawal, means leaving some of your pension fund invested and taking only part of it as income, drawing money from the fund itself³. It is available on defined contribution pensions, and it is worth checking with your provider whether they offer it, because some do not³. There is no limit on how much you can take out each year³.

A third route sits between them: a scheme pension, a secured pension for life paid out of the scheme assets or bought from an insurance company¹⁶. Some providers also offer fixed term retirement plans and cash-out plans alongside annuities and drawdown⁶.

Fees, charges and eligibility

The charges work in opposite ways. An annuity has no ongoing charges: all fees are baked into your income calculation, so there is nothing extra to pay and no investments to manage¹¹. Drawdown carries ongoing charges for managing your investments, plus charges for regular reviews of the income taken out, set by HM Revenue and Customs rules³.

Drawdown platform fees are often tiered. One published example is 0.4% on the first £100,000, 0.3% between £100,001 and £250,000, and so on¹⁰. On a £350,000 pot, one provider's annual fee was reported at up to £3,200¹⁰.

Eligibility differs too. You can buy an annuity from age 55 or over¹⁷. Drawdown is available from 55, rising to 57 from 2028⁷. You need a defined contribution pension to use drawdown³. Drawdown has no minimum income requirements, so anyone with an eligible pot can take a flexible income⁷.

A balance transfer moves the debt, not the interest rate

That heading belongs to a different subject. The equivalent point here is that drawdown moves the risk, it does not remove it. Leaving your pot invested means the stock market can go up or down, and you could end up with far less income than planned³. Drawdown is a higher risk option than an annuity²⁰.

The suitability question is about the size of your pot and your other income. You will probably only want to consider income drawdown if you have a large, six-figure pension fund, or you will have enough other regular income during your retirement³. Drawdown is complex and not suitable for everyone²¹.

Annuities carry their own risk: rates can change substantially and rapidly, so there is no guarantee that rates will be favourable when you buy¹⁹. And once you have bought an annuity you cannot reverse the process⁹.

What happens when you die

This is often the deciding factor. With many types of annuity, payments will stop when you die, and annuities do not usually pay any income to your beneficiaries²². If you did not make any plans for payments to continue or arrange value protection, payments will cease and no death benefits will be paid²³.

You can build in protection when you buy. A joint life annuity, a minimum guarantee period or value protection can all keep money flowing after death²³. Value protection ringfences or preserves a proportion of the amount you paid, usually 50% or 100%, to return as a lump sum²⁴. Die before you benefit from the full value of your pension and value protection will pay the beneficiary a lump sum, minus any income payments and tax².

Drawdown works differently. On death any remaining funds can be passed on, subject to Inheritance Tax from April 2027⁸. Income from annuities will not be subject to Inheritance Tax²².

Opening an account or switching

You are free to buy an annuity from any provider, so there is no need to accept the one your existing provider offers². Most people who shop around get a better deal, and you can combine all your existing pension savings to buy one annuity, which is likely to give a higher income than lots of smaller individual ones².

The gap between shopping around and not is measurable. In January 2025 the best annuity rate for a healthy 65-year-old was around £7,300 a year, 10% higher than the lowest rate of £6,648⁹.

For drawdown, you move money from your pension savings into a drawdown plan and can take up to 25% of those savings tax-free as a lump sum⁸. The maximum tax-free cash across all your pensions is £268,275 unless you have registered for protection⁸. For example, if £100,000 is moved from a pension plan with accumulated savings of £275,000 into a drawdown plan, up to £25,000 can be taken tax-free⁸.

If you have chosen drawdown, the pot needs to be invested in one or more of the investment funds the provider offers⁸. There are also restrictions on the amount of pension contributions you or your employer can make once you are taking a flexible income⁸.

Service and complaints

Complaints about pensions and annuities are common enough to have their own data. In the last financial year, 2024/2025, consumers raised just over 7,300 complaints against pensions and annuity providers²⁵. In the first quarter of 2026/27, the Financial Ombudsman Service recorded 96 complaints about conventional annuities, of which 41% were upheld²⁶.

The Pensions Ombudsman handles issues including guaranteed annuity rates, charges and fees, death benefits, incorrect benefit calculations, and refusal or late payment of benefits²⁷. The Financial Ombudsman Service has also looked at cases where consumers were advised to change pension type, and at complaints about advice to transfer out of policies with guaranteed annuity rates²⁸.

If you are unhappy with advice you received, the ombudsman can examine whether the advice was suitable at the time. In one case, the ombudsman found that none of the guaranteed annuity rates on the original policies were competitive with the wider annuity market at the time of the advice, and the consumer would have preferred to transfer out for better returns²⁸.

Protection for your money

Drawdown offers no guarantees. Unlike an annuity, which pays a fixed income for the rest of your life, there are no guarantees with drawdown²⁹. Your pension can fall in value and your income is not guaranteed; too many early withdrawals could mean you run out of money in later life; and not all providers offer flexi-access drawdown as an option⁷.

An annuity's protection is its certainty. Once bought, it pays a set income for life, and the income is not subject to Inheritance Tax²². But that certainty comes at the cost of flexibility: you cannot cancel or change it if you change your mind¹¹.

The rules also require anyone advising on income withdrawals, short-term annuities or UFPLS payments to explain the possible disadvantages. These include erosion of the capital value of the fund, investment returns less than illustrations, worse future annuity or scheme pension rates, unsustainable income levels and tax implications³⁰.

If you need free, impartial help, Pension Wise offers guidance on your pension options. The Pensions Ombudsman and the Financial Ombudsman Service can look at complaints about pension and annuity providers²⁷.