Drawdown vs Annuity: Which is Better?
When it comes to drawing income from your pension, two core options dominate the landscape: flexi-access drawdown and annuity purchase. Each offers distinct benefits and trade-offs. Increasingly, the best solution lies not in choosing one over the other — but in combining both to create a plan that balances security, flexibility, and control.
In this blog, we revisit the basics, weigh up the key differences, and explore how to shape a retirement income strategy that works for you.
Accessing Your Pension
You can usually begin accessing your personal or workplace pension from age 55 (rising to 57 from 2028, unless protections apply). You’re typically entitled to take 25% of your pot tax-free, up to a cap of £268,275 under current rules. This can be done either as a single lump-sum or phased over time.
From there, you’ll need to decide how to draw income. The three main options are:
Flexi-access drawdown (FAD)
Annuity purchase
UFPLS (Uncrystallised Funds Pension Lump Sum)
UFPLS (Uncrystallised Funds Pension Lump Sum) works in a similar way to drawdown — you withdraw a lump sum directly from untouched pension funds, with 25% paid tax-free and the rest taxed at your marginal income tax rate. The key difference is that, with drawdown, you can take just the tax-free element without triggering any taxable income. Given the overlap, this blog focuses solely on the drawdown vs annuity decision.
Option 1: Flexi-Access Drawdown
Flexi-access drawdown has become the go-to choice for many retirees — and with good reason. It offers maximum control over how and when you draw income from your pension.
With flexi-access drawdown (FAD), you can usually take up to 25% of your pension tax-free — either as a single lump sum or in stages. You don’t have to take this straight away, and you don’t have to take it all.
The remaining funds stay invested, giving your pension the potential to grow. You then draw income as and when needed — this might mean setting up a regular monthly payment (to replicate a salary), taking occasional lump sums for bigger spends, or simply withdrawing some tax-free cash while leaving the rest untouched. The latter can be particularly useful if you have other sources of income to rely on.
Any income you draw from your pension after taking the tax-free element is taxed at your marginal rate — typically 20% (basic rate), 40% (higher rate), or 45% (additional rate), depending on your total taxable income in that year.
Key Benefits:
Maximum flexibility – Flexibility to start, stop, increase, or reduce income to suit your needs.
Tax planning opportunities – Manage withdrawals to stay within lower tax bands and reduce income tax exposure.
Continued investment growth – Your pension pot remains invested, which may support long-term sustainability.
Inheritance options – Under current rules, any funds left in drawdown can be passed to your beneficiaries free from inheritance tax (IHT). However, this is set to change from April 2027, when pension savings will be included in your estate for IHT purposes.
Phased access – You don’t have to take all of your tax-free lump sum at once. You can phase it over time to manage both income needs and tax exposure.
Deferral-friendly – You can take the tax-free element without triggering any taxable income — helpful if you’re not yet drawing a salary or other taxable benefits.
Key Drawbacks:
Market risk – Your pension is still exposed to investment volatility, meaning poor returns could impact your available income.
Longevity risk – There’s no guarantee your pot will last. High withdrawals or long life expectancy could exhaust your funds.
Changing inheritance rules – As mentioned, from April 2027, any undrawn pension savings may become subject to IHT, reducing the value passed on to loved ones.
Option 2: Annuity Purchase
An annuity offers a guaranteed income for life in exchange for part — or all — of your pension pot. While they fell out of favour during years of low interest rates, annuities have enjoyed a revival recently. Higher rates mean improved terms, making them increasingly attractive — especially for those seeking peace of mind over investment risk or those in later life.
Tailoring the Income to Suit You
Annuities aren’t the rigid, one-size-fits-all product they’re often assumed to be. In fact, there are several options to tailor the income to your personal needs and preferences:
Single or joint life – Income can be paid just to you, or continue to a partner after your death — either in full or at a reduced rate (typically 50%).
Level or increasing income – You can opt for a fixed income or one that rises each year — either in line with inflation (e.g. CPI) or by a set amount (e.g. 3%).
Guaranteed periods – Ensure income continues (in full) for a minimum period (e.g. 5, 10, or 15 years), even if you pass away sooner.
Fixed-term or lifetime – Choose a fixed-term annuity (these will pay a guaranteed income for a fixed period, say 10-15 years) or commit to a guaranteed income for life (more common).
Key Benefits
Flexibility – As outlined above, modern annuities offer more customisation than many realise. You can opt for level or increasing income, build in provision for a surviving spouse, or ensure payments continue for a guaranteed minimum period.
Certainty – This is the big one: a fixed, known income that’s unaffected by market volatility or how long you live.
Simplicity – Once set up, there’s nothing to manage. No ongoing decisions, no investment admin — just a regular income you can rely on.
No longevity risk – You can’t outlive the income, which can bring welcome peace of mind and support clearer budgeting.
Improved terms – Annuity rates have improved markedly, especially for those in later life or with health conditions that may qualify for an enhanced rate.
Estate planning potential – If the income isn’t needed, it can be gifted or used to fund life insurance — helping offset future inheritance tax liabilities.
Key Drawbacks
Inflexibility – There is flexibility as to how the policy is set up (see point one from the above ‘Key Benefits’), however, once in place, the terms usually can’t be altered. You can't change your mind if circumstances shift.
No residual value – In most cases, the pot is ‘spent’ at the outset. Unless you build in guarantees, there's typically nothing left to pass on when you die.
Inflation risk – A level annuity won’t keep pace with rising living costs, meaning purchasing power can erode over time (though inflation-linked options are available, at a cost).
Why a Blended Approach Might Work Best
The reality is that you don’t have to choose one or the other. A blended approach can provide a more balanced and sustainable retirement income — offering both certainty and control.
A common (and effective) approach is to split your pension into two distinct pots, each with a clear purpose:
Use part of your pension to buy an annuity that covers your essential, non-negotiable expenses — things like household bills, food, and insurance. This creates a reliable, guaranteed income “floor” that takes the pressure off your investment pot.
Keep the rest in drawdown, where it can stay invested and remain accessible. These funds can be used to support discretionary spending (e.g. holidays, gifts), provide liquidity in emergencies, or form part of your legacy planning.
This hybrid strategy allows you to:
Lock in security – Cover your must-have costs with a guaranteed income for life.
Retain flexibility – Adjust drawdown income in line with your lifestyle, market conditions, or changing needs.
Stay invested – Give your remaining funds the chance to grow and support longer-term goals.
Optimise tax – Manage the timing and source of withdrawals to reduce overall tax exposure, particularly in years where income fluctuates.
For many clients, this mix provides the ideal balance — income when you need it, optionality when you want it, and reassurance that you’re not relying too heavily on a single strategy.
Please note, When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Happy Thursday!
Kind regards,
George
Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
