Income in retirement: Pension Drawdown versus Annuities - the pros and cons

If you are approaching retirement and need your pension savings to provide an income for you, there are a number of quite complex options for you to consider before deciding which route is best for your personal circumstances.

3 min read

You may prefer the certainty of a set income for life offered by an annuity, or it may be that the flexibility of drawdown, with the ability to choose how much and when you take your income, is more conducive to your retirement plans.

Ultimately, a combination of the two may be the best solution. Before making any decisions it is important that you understand the pros and cons of each option.


No matter how long your retirement, a pension annuity will provide an income for life, and this income is not affected by investment market fluctuations. Those with certain health conditions may be eligible for an enhanced annuity.

At the outset, you can select from a number of options to ensure that the annuity meets your particular needs, such as selecting an income that increases every year to help you keep pace with inflation; providing an income for your dependants if you die or building in a guarantee to ensure that your annuity will continue to be paid to your chosen beneficiaries if you die within a specified period of time.

It should be noted that the options you choose at outset will affect the amount of income you receive and the more guarantees you build in the lower your income may be.

There are also downsides to consider when deciding whether an annuity is right for you. Annuity rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension. Plus, the income is generally fixed and cannot be adjusted, so if your circumstances change in retirement and you require more funds you may have to look at other sources to top up your income.

Ultimately, professional, regulated advice should always be sought before an annuity is purchased to make sure that it is suitable for your long-term needs.


By contrast, drawdown can provide a greater degree of flexibility and control over how your money is managed in retirement.

With drawdown you can leave your money invested in your pension pot and then withdraw from it whenever you want. You can take up to 25% as a tax-free lump sum, either straight away or in stages, and make withdrawals whenever you like. You don’t have to commit to a fixed payment, allowing the freedom to make your own decisions about how and when to draw your pension savings. If your investment growth is greater than the withdrawals you make then you have the opportunity to increase your income in future years or to leave a larger inheritance.

On death you can leave any remaining funds to your chosen beneficiaries and the pot will not be liable for Inheritance Tax (IHT). If you die after the age of 75, your beneficiaries may have to pay tax on the money.

Should you change your mind, you can at any time use all or part of the money remaining in your pension drawdown pot to buy an annuity.

The downside of drawdown is that if you take too much too soon, or if your investments don’t perform well, then you may not have enough left to provide an income throughout your retirement. There is no guaranteed income, as with an annuity.

You will need to have a good understanding of how you plan to invest your pension savings and how any losses or gains might affect you in future years. Additionally, you will need to consider the tax implications of any withdrawals.

As with annuities, professional advice should always be taken to ensure that drawdown is appropriate for your retirement planning needs.

Combination of Drawdown and Annuities

For some people, a combination of both drawdown and annuity may provide the best balance, offering security of income and control over withdrawals.

Ultimately, any plans should be tailored to an individual’s needs and circumstances. Professional advice from a certified wealth planner will ensure that all the necessary factors are taken into consideration before a retirement strategy is decided.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.