Last updated: October 2026 · 11 min read
Your pension stays invested, and you draw an income from it — as much or as little as you like, whenever you like. You keep control of the capital, and anything left when you die can normally be passed on. The risk is real, though: if markets fall, especially early in retirement, or if you draw down too quickly, your pot can run out.
You hand over some or all of your pension pot to an insurance company, and in exchange they pay you a guaranteed income for the rest of your life — however long that turns out to be. Once you buy it, that's it: you can't change your mind, get the capital back, or switch providers. In exchange for giving up flexibility, you get complete certainty.
Annuity rates are directly linked to interest rates and government bond yields, and both have pushed rates to their best levels in well over a decade. As a rough guide for a healthy 65-year-old buying a standard single-life annuity with a £100,000 pot:
These figures move regularly with the market, so treat them as a general guide rather than a quote — always get an up-to-date, personalised comparison before deciding.
| Drawdown | Annuity | |
|---|---|---|
| Income certainty | Not guaranteed — depends on investment performance and how much you withdraw | Guaranteed for life, regardless of markets or how long you live |
| Flexibility | Full control — vary income, take lump sums, stop and start | None — fixed once purchased |
| What happens if you die early | Remaining pot can normally pass to beneficiaries | Depends on the options chosen (guarantee period, joint life, value protection) — otherwise payments simply stop |
| What happens if you live a very long time | Pot could run out | Keeps paying regardless — this is the annuity's core strength |
| Reversible? | Yes, in principle — you retain the capital | No — irreversible once bought |
| Inheritance tax (from 6 April 2027) | Any pot left when you die will normally count towards your estate for inheritance tax, unless it goes to a spouse, civil partner or charity | A lifetime annuity normally stops when you die, so usually little or nothing is left to count — check how any guarantee or protection option is treated |
An illustration with round numbers, not a quote. Imagine a healthy 65-year-old with £200,000 left in their pension after taking their 25% tax-free cash, who also gets the full State Pension from 67.
| Option | Income in year one | After that | Left when they die |
|---|---|---|---|
| Level annuity, around 7% | About £14,000, guaranteed for life | Fixed in pounds, so inflation reduces what it buys each year | Normally nothing, unless a guarantee or protection is added |
| Inflation-linked annuity | Noticeably lower than a level annuity | Rises each year with inflation, guaranteed for life | As above |
| Drawdown at 4% | About £8,000 | Can rise with inflation or change any year; depends on returns | Whatever is left (counts for inheritance tax from April 2027, except to a spouse or civil partner) |
| Drawdown at 7% (to match the annuity) | About £14,000 | Much higher risk of running out, especially if markets fall in the early years | Less, and possibly nothing |
| Blend: £100,000 each way | About £7,000 guaranteed, plus about £4,000 flexible | A guaranteed floor, with flexibility on top | Whatever is left of the drawdown half |
The pattern is clear: at today's rates, a level annuity pays far more at the start than a cautious drawdown rate. The price is that it's fixed, it can't be undone, and usually nothing is left behind. Drawdown starts lower if you want the pot to last, but keeps your options open. In this example all of the income is taxable, alongside the State Pension.
The right answer depends on your other income, your health, and what you want to leave behind — which is why it's worth modelling your own figures rather than relying on round numbers like these.
Annuities tend to suit: people who want certainty above all else, those without other family to leave money to, people with a health condition qualifying for an enhanced rate, and anyone who worries about running out of money more than they value flexibility.
Drawdown tends to suit: people who want to leave money to family (bearing in mind the 2027 inheritance tax change), those with other guaranteed income already (like a State Pension or DB pension) covering essential costs, people comfortable with investment risk, and anyone who values being able to adapt their income as circumstances change.
A common and sensible approach is to blend the two: use part of your pot to buy an annuity covering your essential costs — bills, food, housing — so that baseline is guaranteed no matter what, while keeping the rest in drawdown for flexibility, growth potential, and the ability to leave something behind. This is exactly the kind of "bucket strategy" that a proper cashflow model can help you size correctly.
Before deciding how to structure your income, it helps to know your target. Our free Budget Planner maps what you spend today against what you'll need in retirement.
Try the free Budget Planner →Time to Retire's full planning tool lets you stress-test a drawdown strategy against market downturns, model an annuity purchase at any age, or blend both — with real UK tax modelling throughout. Annuity figures in the tool are indicative estimates based on what you enter, not a personalised quote — always get a real comparison before buying.
Try the free demo →A sample household, no sign-up. Or see the features and screenshots.
Neither is better in general. An annuity is better at removing the risk of running out of money; drawdown is better at keeping flexibility and leaving something behind. Many people use both.
Usually yes. You can normally use some or all of a drawdown pot to buy an annuity at any point, and annuity rates generally improve as you get older. The reverse isn't possible: once you buy an annuity, you can't turn it back into a pot.
Yes. Annuity income is taxed as income, like a salary or pension. You can usually take up to 25% of your pot tax-free before buying, up to the £268,275 Lump Sum Allowance.
With drawdown, the remaining pot can normally pass to the people you nominate, and from 6 April 2027 it will usually count towards your estate for inheritance tax. With a lifetime annuity, payments normally stop, unless you chose a joint-life annuity, a guarantee period or value protection. Our guide to inheritance tax on pensions explains the 2027 change.
Neither option is right or wrong — they solve for different things. Drawdown gives you control and flexibility, at the cost of investment risk. An annuity gives you certainty for life, at the cost of ever changing your mind. With annuity rates at their best in a decade, it's genuinely worth running the numbers on a blend of both, rather than assuming drawdown is automatically the better choice simply because it's more common.
This guide is for general information only and is not financial advice. Annuity rate figures are indicative, based on published market data as of mid-2026, and change frequently — always obtain an up-to-date, personalised quote before making a decision. Time to Retire is a software tool, not a financial adviser, and is not authorised or regulated by the FCA. For advice specific to your circumstances, consult a qualified independent financial adviser.
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