When you come to turn pension savings into income in the UK, two main options come up: a drawdown pension and a lifetime annuity. They work very differently, and which suits you depends on your priorities. Here’s how they compare.
What is a drawdown pension?
With drawdown (also called flexible or income drawdown), you keep your pension invested and withdraw income as you need it. The appeal is flexibility and the chance for the remaining pot to keep growing — but income can fall as well as rise with investment performance, and there’s a risk of running the pot down too quickly.
What is a lifetime annuity?
An annuity uses your pension pot to buy a guaranteed income for life from an insurer. You get certainty — a fixed or escalating income regardless of how markets perform or how long you live — but you usually give up control of the capital once it starts.
How they compare
- Flexibility — drawdown: high; annuity: low (fixed income).
- Control of capital — drawdown: stays invested under your control; annuity: capital is used to buy the income.
- Income stability — drawdown: variable; annuity: guaranteed.
- Who bears the risk — drawdown: you carry investment and longevity risk; annuity: the insurer takes on longevity risk.
- On death — drawdown: remaining pot can pass to beneficiaries; annuity: usually nothing left, unless you add a guarantee period or joint-life cover.
What happens to the money on death?
With drawdown, any remaining pension typically passes to your nominated beneficiaries — generally free of income tax if you die before 75, or taxed at their income tax rate if after 75. (Pension death-benefit rules are an area of ongoing change, so it’s worth checking the current position.) With an annuity, the capital is usually used up, though guarantee periods or joint-life options can provide some continued payments.
Which is right for you?
It comes down to your appetite for risk, your need for flexibility, and whether leaving a legacy matters to you — and many people use a mix of both. This is a decision where regulated advice is genuinely valuable; nothing here is a recommendation, just an explanation of how the two options differ.