One of the biggest financial decisions you will make is how to take income from your pension pot at retirement. The two main options — buying an annuity or using drawdown — have very different characteristics and suit different people.
- What is an annuity?
- What is drawdown?
- A hybrid approach
What is an annuity?
An annuity converts your pension pot into a guaranteed income for life. You pay your pension fund to an insurance company and they promise to pay you a set amount every month for the rest of your life, no matter how long you live.
Annuity rates have improved significantly since interest rates rose, making them far better value in 2026 than they were a decade ago. A £100,000 pension pot might now buy an annuity paying around £6,500 to £7,000 per year for life for a 65-year-old.
The appeal of annuities is certainty — you know exactly how much income you will receive and you cannot outlive your money. The downside is inflexibility — once purchased an annuity generally cannot be changed, and if you die early the insurance company keeps the remaining value.
What is drawdown?
With drawdown you keep your pension pot invested and draw an income directly from it as needed. This gives you flexibility — you can take more in some years and less in others — and your remaining pot continues to grow with investment returns.
The risk of drawdown is that if your investments perform poorly or you draw too much income, you could run out of money in old age. This sequence-of-returns risk is the biggest challenge for drawdown investors.
A hybrid approach
Many retirees use a combination of the two — using an annuity to cover essential living costs with the certainty of guaranteed income, and using drawdown for the remainder of their pot to maintain flexibility and investment growth potential.
The state pension also provides a guaranteed income base, which should be factored into your retirement planning.
Bottom line
Neither annuity nor drawdown is universally better — the right choice depends on your health, attitude to risk, other income sources, and personal preferences. Regulated financial advice is particularly valuable for this decision given the sums involved and the irreversibility of some choices.