Annuity vs drawdown – what's the difference?

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.

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

The similarities

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.