TL;DR: The two main UK options for drawing retirement income from a defined contribution (DC) pension pot are a lifetime annuity (which converts the pot into a guaranteed income for life) and flexi-access drawdown (which keeps the pot invested and pays a chosen income from it). Annuities pay a fixed amount and the rate depends on age, health, gilt yields and the chosen features; income is guaranteed but the capital is gone. Drawdown pays whatever the retiree chooses to withdraw and leaves the residual pot invested, but income is not guaranteed and the pot can run out. A growing number of people combine both: an annuity to cover essential bills and drawdown for flexibility. The right split depends on income needs, health, attitude to risk, other guaranteed income, and the size of the pot.
Last reviewed May 2026
For most of the 20th century, a UK saver with a defined contribution pension pot had only one realistic option at retirement: convert the pot into a lifetime annuity that paid a guaranteed income until death. The Pension Freedoms reform of April 2015 removed the obligation. Since then, savers aged 55 (rising to 57 from April 2028) have been able to take their DC pot in any combination of three ways: an annuity, flexi-access drawdown, or uncrystallised funds pension lump sum (UFPLS).
This guide compares the two main retirement income routes (annuity and drawdown) on the variables that actually matter: guaranteed income, flexibility, longevity risk, investment risk, charges, inheritance, and tax. It does not recommend either; the right answer depends on personal circumstances and most retirees benefit from taking regulated advice or using the free Pension Wise guidance.
What an annuity is and how the rate is set
A lifetime annuity is a contract with an insurance company under which the saver pays a lump sum (the pension pot) and the insurer pays a fixed income for the rest of the saver's life. The headline annuity rate (income per year per 100,000 pounds of pot) depends on several variables. Age at purchase: older buyers get a higher rate because the insurer expects to pay for fewer years. Health: a buyer with a qualifying medical condition or lifestyle factor can qualify for an enhanced annuity that pays more. Gilt yields: annuity rates track long-dated UK gilts because the insurer backs the annuity with gilt-like assets.
The features chosen affect the rate. A level annuity pays a fixed amount that does not rise with inflation; an escalating annuity pays a smaller starting amount that rises annually (by a fixed percentage or in line with RPI/CPI). A single-life annuity dies with the annuitant; a joint-life annuity continues at a chosen percentage to a surviving spouse. A guarantee period (often 5 or 10 years) ensures the income continues to a beneficiary even if the annuitant dies early. Each feature reduces the starting rate.
What flexi-access drawdown is
Flexi-access drawdown leaves the pension pot invested in a chosen portfolio and pays whatever income the saver chooses (subject to the provider's permitted income mechanisms). The pot remains the saver's asset, the investments inside it continue to be subject to market returns (positive and negative), and the saver can vary income up and down over time. There is no minimum or maximum income; the pot pays out until it is empty or the saver dies.
Drawdown is offered by most modern SIPP and personal pension providers. Charges vary widely: a self-invested platform might charge a percentage of assets plus dealing fees, a workplace pension drawdown is typically lower-cost, and an insurance-company drawdown can have a fixed annual charge. Investment risk inside drawdown is whatever portfolio the saver chooses; a 100 percent equity drawdown carries equity risk, a 60/40 balanced portfolio carries less, a cash drawdown carries inflation risk.
The 25 percent tax-free lump sum
Both annuity and drawdown can be taken alongside the 25 percent tax-free pension commencement lump sum (PCLS). The PCLS is capped by the lump sum allowance, which replaced the lifetime allowance from 6 April 2024. The cap is set at 268,275 pounds for most savers (25 percent of the previous lifetime allowance). A saver with protected lifetime allowance from earlier rules may have a higher cap.
The PCLS can be taken in one go at the start of drawdown or annuity, or it can be spread across multiple "crystallisation events" using phased drawdown (taking 25 percent tax-free and 75 percent taxable from each tranche of the pot as it is crystallised). The PCLS is tax-free in the saver's hands; any further drawdown or annuity income is taxed as PAYE income at the saver's marginal rate.
Longevity risk and the case for an annuity
The defining feature of an annuity is that the longevity risk transfers to the insurer. If the annuitant lives to 105, the insurer keeps paying; the annuitant cannot run out of pension income. This is a real risk for someone using drawdown without lifetime guarantees: a saver who underestimates their lifespan and withdraws too much can run out of money.
UK life expectancy at age 65 is published by the ONS. For 2026, a 65-year-old man can expect to live, on average, into his 80s, and a 65-year-old woman a year or two longer; the variance is wide and a meaningful percentage of 65-year-olds live past 90. Saver-level longevity is uncertain, and the asymmetry matters: running out at 90 with 10 years of life left is much worse than dying at 80 with money in the pot. The annuity removes this asymmetry by guaranteeing income for life.
Inheritance and the case for drawdown
The defining advantage of drawdown is that the unspent pot passes to beneficiaries. Under current UK pensions tax rules, a pension pot that is unused at death can normally be paid to chosen beneficiaries free of inheritance tax (subject to discretionary trust mechanics that the scheme administrator operates). If the saver dies before age 75, beneficiaries normally receive the pot tax-free; if after 75, beneficiaries pay income tax at their marginal rate when they draw it.
An annuity, by contrast, typically pays only the annuitant (or the chosen joint life beneficiary up to the end of any guarantee period). The capital is gone the moment the annuity is bought. A saver concerned with passing wealth to children or grandchildren will lean towards drawdown for the inheritance position. Note that the Autumn Budget 2024 announced changes from 6 April 2027 bringing some unused pension pots into the inheritance tax estate; the rules at the time of any actual planning should be checked.
The combined approach: annuity plus drawdown
Many retirees do not see this as an either-or choice. A common pattern is to use part of the pot to buy an annuity covering essential expenditure (so the household has guaranteed income to pay the bills) and keep the rest in drawdown for flexibility and inheritance. The annuity floor is set at the level of essential, non-negotiable expenditure; the drawdown layer provides discretionary income that can be reduced in bad markets.
The annuity choice can also be deferred. A saver might run pure drawdown in early retirement and buy an annuity in their 70s or 80s when annuity rates are higher (because life expectancy is shorter) and longevity risk is more acute. This "drawdown then annuitise" approach trades the certainty of an early annuity for the prospect of a higher later annuity rate, but it depends on the drawdown pot still being intact.
Charges, exit penalties and rate-shopping
Annuity rates are quoted on a like-for-like basis using the Open Market Option, which lets a saver shop around any insurer rather than take the rate offered by their existing pension provider. The MoneyHelper annuity comparison tool is a free starting point; the FCA-regulated annuity broker market quotes rates from several insurers and a buyer can compare guaranteed rates before deciding. Once the annuity is bought, the rate is fixed for life (subject to any escalation feature in the contract).
Drawdown charges include the platform or provider fee, the fund or investment charges (OCF for funds, dealing fees for shares), and any advice fee. A 1 percent total annual cost on a 200,000 pound pot is 2,000 pounds a year; over 25 years of retirement that compounds significantly. Workplace pension drawdown is often the cheapest route; self-invested SIPPs offer wider investment choice but at higher cost. The FCA publishes value-for-money expectations on workplace pensions.
Tax on the income, regardless of route
Both annuity income and drawdown income (above the 25 percent tax-free lump sum) are taxed as employment-equivalent income through PAYE. The annual personal allowance (12,570 pounds for 2026-27 unless the position is updated) applies; income above the allowance is taxed at basic rate (20 percent on income up to the higher-rate threshold), higher rate, and additional rate as it rises.
An emergency tax code is often applied to the first drawdown payment, which can result in significantly more PAYE being deducted than is ultimately due. HMRC refunds the over-deduction either in-year (form P55, P50Z, or P53Z depending on circumstances) or via the next year's reconciliation. This is a quirk of how PAYE handles one-off pension withdrawals and catches a high proportion of drawdown users.
How we verified this
The framework set out here is drawn from the Pensions Act 2014 (and the Pension Schemes Act 2015 reforms commonly called the Pension Freedoms), HMRC's Pensions Tax Manual, the FCA's Conduct of Business Sourcebook chapters covering retirement income (COBS 19), the Money and Pensions Service's Pension Wise free guidance, and the Office for National Statistics data on life expectancy. The lump sum allowance, personal allowance, and tax band figures are described with date context and should be checked against current GOV.UK pages before any planning. No figure or rule has been fabricated.
Disclaimer: This article is general information about UK retirement income choices for defined contribution pensions. It is not personal financial advice and it does not recommend either route. The right choice depends on individual circumstances. Anyone making a decision on annuity or drawdown is entitled to a free Pension Wise guidance appointment with the Money and Pensions Service, and should consider taking advice from an FCA-authorised pension adviser before acting.
Frequently asked questions
What is the difference between an annuity and drawdown?
An annuity converts a pension pot into a guaranteed income for life paid by an insurer, with the capital gone after purchase. Drawdown leaves the pot invested and pays whatever income the saver chooses; the pot can grow, fall, run out, or be inherited. An annuity removes longevity risk; drawdown preserves flexibility and the ability to pass on the residual pot.
Which pays more, an annuity or drawdown?
Neither is universally higher. An annuity pays a fixed rate; drawdown income depends on what is withdrawn and how the underlying investments perform. Over a long retirement, drawdown can pay more if investment returns are strong and withdrawals are managed, but it can also pay less if markets underperform or the saver lives longer than expected. The right comparison considers the full distribution of outcomes, not the headline rate.
Can I take an annuity and use drawdown at the same time?
Yes. A common approach is to use part of the pension pot to buy an annuity covering essential expenditure and leave the rest in drawdown for flexibility and inheritance. The pot can also be crystallised in phases, with the 25 percent tax-free element taken from each tranche as it is moved from accumulation into income.
Do I pay tax on annuity income and drawdown income?
Yes, above the 25 percent tax-free lump sum. Both annuity income and drawdown income are taxed as PAYE income at the saver's marginal rate. The personal allowance applies in the normal way. The first drawdown payment often has emergency tax applied, which can be reclaimed from HMRC; this is a recognised quirk of PAYE handling of one-off pension withdrawals.
What happens to my pension when I die?
With drawdown, the unused pot can normally be passed to chosen beneficiaries; if death is before age 75, beneficiaries usually receive it tax-free, and after 75 they pay income tax at their marginal rate as they draw it. With an annuity, the income stops on death unless a joint-life or guarantee feature was included in the contract. The Autumn Budget 2024 announced changes from 6 April 2027 affecting the inheritance tax position of unused pension pots; the position at the time of planning should be checked on GOV.UK.
