01 January 2024

Many of us have spent the last few decades planning and carefully saving for the things that are important to us, whether that’s life’s luxuries, our mortgages and bills, or our plans for the future. As we get older we might have different priorities, but our financial planning for retirement should be just as important.

That’s where annuity and drawdown products can help. Here we talk about the differences between annuity and income drawdown, and hopefully help you decide if either or both are right for you.

What's the difference between an annuity and income drawdown?

When you reach retirement age, you need to decide how to use the money in your pension to give you 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 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 or an ‘annuity’. With a pension annuity you’ll know exactly how much you’re getting, come rain or shine.
  • You can draw down money from your pension pot.
    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 drawdown, though its value could also drop. You can also run out of money, so unlike an annuity your payments are not guaranteed.

Which is better – annuity or drawdown?

That depends on your specific needs and circumstances. As a rule, people choose drawdown products for their flexibility and annuities for their reliability. 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.


30% 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, April 2024.

Annuity and drawdown compared

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 chart together to show you.

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. But because it’s not guaranteed, you could run out of money.

Once agreed, it can't be changed

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

Once agreed, it can be changed

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.

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 cash 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.

See how much you could get

Our retirement income calculator will help you explore your choices and see how much you could get.

Explore our annuity and drawdown products

You can visit our annuity and pension drawdown pages to find out more.

What’s next

We hope that’s helped you understand the difference between annuities and drawdown.

Now we recommend shopping around to find the right product for you, whether that’s one of ours or someone else’s. Your pension provider might have an annuity or drawdown product of their own, though you don’t have to buy it. Other providers will offer different and possibly better products and rates.  

You can use our retirement income calculator to check your possible income, based on how much you have to spend. Or you can use our pension drawdown calculator to see how much income you could receive with pension drawdown. We can also put together a personalised annuity quote for you, which will:

  • Give more details on what you’d get with us
  • Tell you if you could get a better rate elsewhere.

For more information on annuities, visit the Pension Wise website. It's a free government guidance service from MoneyHelper. If you're looking for a financial adviser, the Unbiased website will help you find one. That’ll put you in good company – 55% of over-55s who have accessed a pension chose to seek guidance from a regulated adviser or Pension Wise from MoneyHelper. One in five of the 45% who didn’t get guidance now regrets their decision.

And of course we’d be very happy to answer your questions ourselves – just call us on 0800 048 2446 or visit our pension annuity page for more information.

Lines open Monday to Friday 9am to 5pm. We may record and monitor calls.

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