23 Apr 2024

Annuity vs drawdown – what's the difference?

Annuities and drawdown are the two main ways of funding your retirement using your pension pot. Depending on what you need and how your finances are looking, you might choose either a pension annuity or pension drawdown, or a blend of both.

This article explains:

  • The differences between them
  • Their pros and cons
  • How to find out more
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Annuity calculator

It’s simple to use, and provides a helpful estimate of your potential guaranteed income in retirement. How much could you get?

What's the difference between an annuity and drawdown?

When you retire, you need to decide what to do with the money you’ve saved into your pension to provide you with an income through your retirement years. Annuities and drawdown are two of the most common ways of taking a regular income.

You can use money from your pension pot to buy an annuity.

  • A pension annuity is a product that pays you a regular guaranteed income for the rest of your life, no matter how long you live. One option is to convert the pension pot you’ve built up into a regular income. You can do this by buying what’s called a pension annuity, lifetime annuity or simply an ‘annuity’ with some or all of the money in your pension pot. With a pension annuity you’ll know exactly how much you’re getting, come rain or shine.
  • Once you’ve set up your annuity you can’t make any changes to it. So it’s important to shop around and find the one offering the best annuity rate and product options for you.

You can move some or all of your pension pot money into drawdown.

  • Putting your pension pot into drawdown means you leave your money invested for you to take out (or ‘draw it down’) as and when needed. The money left invested could grow to replace some or all of the money you draw down, though its value could also drop.
  • Drawdown is much more flexible than an annuity. You can change how much and when you take money out of it, and how any money you don’t take out is invested. But you could run out of money because, unlike with an annuity, your payments are not guaranteed.

Which is better – annuity or drawdown?

That depends on what’s most important to you. As a rule, people choose drawdown products for their flexibility and annuities for their predictability. And it doesn’t have to be an either/or pension drawdown vs annuity choice. More and more people are using both together.

For example, when you retire you might want to guarantee that you can always cover your bills. So you spend some of your pot on an annuity, which gives you a guaranteed income for life. Then you can invest the rest of it however you’d like.

“Whether you buy an annuity, invest, or have a combination of solutions, it’s important to think carefully about your options and income streams. And retirement planning isn’t once and done – you’ll need to keep an eye on how it’s all working out and probably update your approach every so often. If you’re still unsure, it’s best to get advice or seek further guidance through Pension Wise.” - Lorna Shah, Managing Director of Legal & General Retail Retirement

14% rise in annuity rates in two years

Could now be the best time to buy an annuity? We look at what this means for your retirement income.

Based on Legal & General annuity rates, July 2024.

Pros and cons of annuities vs drawdown

So what is the difference between annuity and income drawdown? And is there anything about them both that’s the same? We’ve put this annuity vs income drawdown chart together to show you. To make it simple, we've compared a lifetime annuity with drawdown, but if you want to weigh up a fixed term annuity vs drawdown we have a separate article on fixed term annuities

The differences

                       Annuity                 Drawdown

The amount you’ll get is guaranteed

You pay your provider a fixed amount to buy your annuity. They will then make guaranteed payments to you for the rest of your life or an agreed period.

The amount you’ll get is not guaranteed

The value of your pension pot can go down as well as up. That can affect the amount you can draw down from it. But your payments aren’t fixed – you can choose how much income you want to take, and when. 

An annuity is a lower risk product

Once you buy an annuity, your income is guaranteed. It will never unexpectedly stop or run out.

Drawdown can be a risky product

It’s dependent on your pension pot, which could lose value or even run out.

Your pension pot can’t grow any more

You use your pot to buy your annuity. Once it’s spent, it can’t go up or down in value, unless you have selected an increasing option.

Your pension pot could still grow

Any money you don’t draw down stays invested. Its value can still grow, though it could also go down.

Once agreed, you have no flexibility

Your pension annuity can’t be cashed in or surrendered. You can’t make any changes once it’s up and running.

Once agreed, you have some flexibility

You can draw down as much money as you want, stopping and starting whenever you want to. You can buy a pension annuity at any future point.

Your health and lifestyle matter

If you’re not in good health, or make certain lifestyle choices, providers may offer you a higher income - this is an enhanced annuity.

Your health and lifestyle don’t matter

Your age and lifestyle make no difference to the amount you might get from a drawdown.

There are no ongoing costs

Once your annuity’s up and running, you don’t need to pay any fees or charges.

There are ongoing costs

Your provider will charge you a fee for your drawdown account.



The similarities

For annuities and drawdown

You must be aged at least 55 (or 57 after April 2028).

You can usually take up to 25% of your pension pot as a tax-free lump sum.

Any income you take is taxable

Income above your personal allowance is taxable. The amount of tax you pay on your annuity or drawdown income will depend on your circumstances.

Your state benefits could be affected

Annuity or drawdown income could affect your entitlement to any means-tested state benefits.

Your loved ones might inherit some money

You can name a loved one as a beneficiary, so they receive money after you die. You can learn more in our article, 'What happens to an annuity when you die?'.

What should I do next?

So are annuities worth it? Or is pension drawdown better than an annuity? Or maybe both? Well, that depends on your financial goals and circumstances. If you’re still not sure, we’d recommend:

  • Getting some financial advice or guidance:
    • if you don’t already have a financial adviser, you can find one at Unbiased
    • if you’re over 55, try our own Retirement Advice Service
    • if you’re over 50, book a free appointment with Pension Wise for impartial guidance 
  • 55% of over-55s who have accessed a pension chose to seek advice from a regulated adviser or guidance from the free, government-backed service, Pension Wise.
  • One in five of the 45% who didn’t get guidance now regret their decision.
  • If you need an annuity vs drawdown calculator, use our annuity calculator to explore your choices and get annuity vs drawdown example.
  • Find out more about our own pension annuity and pension drawdown products.

And of course we’d be very happy to answer your questions ourselves – just call us on 0800 048 2446. Lines open Monday to Friday 9am to 5pm. We may record and monitor calls.

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Guide to buying an annuity

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How do annuities work?

Many people are looking for reliable ways of funding their later years. Perhaps you want to make sure the bills are covered for the foreseeable future. Maybe you’d like to fund those trips you’ve always dreamed of taking, or that hobby you’ve always loved so much. Or you might just want to top up your income when you switch to working part time.

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