A quick guide to Annuities vs Drawdown

12 January 2017

Written by Retirement Line Updated: 11th February 2025

If you are due to retire soon then you may currently be negotiating the minefield of pension options in front of you – and the choice you potentially face between annuities and drawdown products.

The ‘pension freedoms’ introduced in 2015 dramatically changed the way retirement savings can be accessed and used. You can take 25 per cent of your fund tax-free and the rest can be taken as either an annuity, drawdown or cash (taxed at your marginal rate) – or a combination of the three.

You might be wondering what the difference is between a traditional annuity and a drawdown product. So, to help you work out which might be best for you, here is our impartial quick guide to annuities vs drawdown. 

So first… what is an annuity?

Many people rely on the financial security of a fixed regular income, particularly if wanting to maintain a certain lifestyle in retirement that relies on a guaranteed income. That’s what an annuity brings you.

An annuity is purchased with the money built up in your defined contribution pension fund throughout your career. It converts your pension pot into a guaranteed regular income for your whole life, or for a fixed term. You can take up to 25% of your pension fund tax-free before buying an annuity with the remaining fund. 

With an annuity, if you pass away after five years, for example, your annuity provider would keep the remainder of your pension pot, unless you purchased additional death benefits at the outset. However, if you continue to live for forty years after retirement, you would continue to receive your guaranteed income even if you have reached and surpassed the original value of your fund. 

Flexi-access drawdown (drawdown)

With an income drawdown product, you can keep your defined contribution pension fund invested, take some or all of your tax-free cash and withdraw income from your pension fund as and when you need it. 

Your fund remains invested so can continue to grow, and is available for the benefit of your loved ones on your death. Unlike an annuity, however, the income is not guaranteed and depends on investment performance. 

With a drawdown product you can still buy an annuity in the future. For example, you may decide to remove investment risk from your retirement planning as you get older. Or you may find that your health worsens and you become eligible for higher annuity rates and income with an enhanced annuity.

How do they compare?

There are some important similarities between annuities and drawdown:

• Tax-free cash. With both products, you can take up to 25% of your pension pot as a tax-free lump sum at the outset.

• Taxable income. If you take your maximum tax-free lump sum, all the income you then receive from both products is taxable at your marginal rate (in the same way as employment income).  

• Benefit entitlement. Income from both annuities and drawdown could potentially affect your entitlement to means-tested benefits including Pension Credit, Housing Benefit and Council Tax Support. Please seek suitable advice if this is of relevance to you. 

There are also some significant differences to weigh up if you choose not to buy an annuity and instead leave your pension fund invested with a drawdown product.

Investment risk and reward

As your pension remains invested with drawdown, the value of your pension pot could decrease if the funds you have invested in do not go on to perform well, so they might not be able to sustain the amount of future income you need. Plus, if you withdraw too much income too soon, you could deplete your pension fund.

However, drawdown may be suitable for some people who are seeking more control over their pension funds and are willing to take investment risk. As your money remains invested, you may see your retirement savings grow if your fund performs well. 

This contrasts with lifetime annuities, which carry no investment risk but also no opportunity for growth as you receive a guaranteed income. However, you do have the opportunity to lock-in a guaranteed rate of return with a fixed-term annuity.

Death benefits

Another difference between annuities vs drawdown is in the area of death benefits. With drawdown, when you die your dependents or nominated beneficiaries will benefit from any remaining money from your pension pot. 

By default, annuities don’t typically include death benefits. However, you can add these to your annuity contract quite easily, and in fact there are different types of death benefit from which to choose. See our guide to annuity death benefits for more details: What happens to an annuity when you die?

Flexibility

Drawdown is inherently flexible. To begin with, you do not need to take all of your tax free cash allowance in one go: you can phase it over time, which can help minimise income tax from your pension withdrawals. 

You can also take as little or as much income as you like until your fund runs out. That can be attractive, but care may need to be taken so that you don’t take too much, too soon.

In contrast, once it’s set up, you typically can’t change or end an annuity contract. You need to be very confident that you do want the benefit of guaranteed income with no opportunity to change your mind. 

However, there is flexibility with a fixed term annuity. You can set these up with a locked-in guaranteed maturity amount, which is a lump sum available at the end of the term. You can use this lump sum however you wish, such as to set up another annuity, set up a drawdown plan, or access it as cash subject to income tax.

Annuities vs drawdown at a glance

For ease, here is a summary of the benefits and drawbacks of annuities vs drawdown…                                                            

Do I have to choose between an annuity or drawdown?

It is worth remembering that you don’t have to choose one option or the other. After taking the time to research all avenues, some people opt for blending different retirement income solutions and options to meet their needs, goals and risk preferences.

You may for example decide to take a ‘blended approach’ with some of your pension savings buying an annuity and some being used for drawdown. One scenario is where you set up an annuity to cover day-to-day expenses and leave the remaining funds to hopefully grow through investments.

Retirement Line's annuity service 

If you are unsure whether an annuity is right for you, why not talk to us? As the UK's largest pension annuity broker*, we specialise in helping people aged 55+ shop around for the best annuity rates and income.

Our friendly and helpful Annuity Specialists can provide comprehensive information about this option and as many personalised annuity quotes from the UK’s leading providers as you require.

You can also use our free annuity calculator to see how much income you could secure with an annuity - or call us on 0800 652 1316 or request a call back to talk to one of our friendly team today.