The decision at retirement—what to do with the pension pot—is one of the most consequential financial choices most UK retirees make, and one of the few that is partly irreversible. Get drawdown wrong and you outlive the money. Lock in an annuity at the wrong time and you sacrifice three decades of growth for a payment that looked good on the day. The right answer is rarely either pure option; it is almost always a thought-through blend.
This article walks through both options as they stand in 2026—the current annuity market, what drawdown actually requires you to do month by month, and a decision framework that does not pretend the choice is simpler than it is.
What each option means
Drawdown
You leave your pension pot invested. Each year you withdraw an income—sometimes a fixed amount, sometimes a percentage of the pot, sometimes flexibly as you need it. You manage the investments and the withdrawal rate.
Annuity
You hand the pension pot to an insurance company. They pay you a guaranteed income for life. The amount depends on your age, health, the size of the pot, and the type of annuity (single life, joint, escalating, and so on).
Once an annuity is bought, the decision is irreversible. The pot is gone; the income is fixed.
Annuity rates in 2026
Annuity rates have recovered dramatically since the lows of the 2010s. A rough snapshot for a healthy 65-year-old, single life, level (non-escalating) annuity:
| Pot size | Annual income (single life) | Annual income (joint, 50% spouse) |
|---|---|---|
| £100,000 | £6,800 | £6,200 |
| £250,000 | £17,000 | £15,500 |
| £500,000 | £34,000 | £31,000 |
| £1,000,000 | £68,000 | £62,000 |
These are roughly 6.5–6.8% on the pot. Compare to historical lows around 4% in 2020. The recovery is structural—annuities use long-dated UK gilts, and gilt yields have risen materially since the early 2020s.
Inflation-protected (RPI-linked) annuities offer about 25–35% lower starting income but increase with inflation each year. For someone planning a 25-year retirement, the inflation-linked option usually matches a level annuity by year 12–15.
Enhanced or impaired-life annuities offer higher rates if you have qualifying health conditions or lifestyle factors—smoking, high BMI, and so on. The uplift can be 10–25%. Anyone with diabetes, heart conditions, or cancer history should always shop the impaired-life market—many people leave money on the table because they did not think to mention something the underwriter would have valued.
What drawdown actually requires
Drawdown sounds passive—leave the pot invested, withdraw what you need. In practice it requires you to:
- Pick a withdrawal rate. The standard “safe withdrawal rate” research (Bengen, Trinity studies) suggests 4% adjusted for UK gilts and equity returns is reasonable for a 25–30 year retirement. More aggressive (5%) risks running out; more conservative (3%) leaves money unspent.
- Manage the asset allocation. Too much equity → vulnerable to market crashes near retirement. Too much cash → erodes to inflation. Standard recommendations are 50–70% equities sliding to 30–50% in later retirement.
- Watch for sequence of returns risk. Drawing down during a market crash early in retirement permanently damages the pot—even if markets recover later.
- Periodically rebalance between equity and bond allocations.
- Think about tax—drawdown income above your personal allowance and the 25% tax-free cash is taxed as income.
This is fine for someone financially literate and comfortable with admin. For someone who finds it stressful, or who is at risk of cognitive decline later in retirement, drawdown is genuinely demanding rather than passive.
Sequence of returns risk
The single biggest mathematical risk in drawdown.
Two retirees, same starting pot of £400,000, both withdrawing £20,000/year (5%). Both achieve the same average return of 5% over 30 years. The difference: one experiences a 30% market crash in year 2, the other in year 28.
| Retiree | Outcome |
|---|---|
| Crash in year 2 | Pot exhausted by year 19 |
| Crash in year 28 | Pot still has ~£200,000 at year 30 |
Same average return. Same withdrawal. Vastly different outcomes.
Standard mitigations:
- Reduce withdrawals in down years (and accept the income variability).
- Hold a cash buffer of 1–2 years of living expenses to avoid selling equities at depressed prices.
- Bond ladders for a portion of the income (5–7 year ladder).
- Partial annuitisation to cover essential spending—see below.
The case for partial annuitisation
A pattern increasingly recommended: buy enough annuity to cover essential spending, leave the rest in drawdown for flexibility and growth.
Worked example. £400,000 pot, retiree aged 65. Essential annual spending (housing, food, utilities, council tax): £18,000. State Pension covers £12,000. The gap to cover with annuity: £6,000.
Buy a level £6,000 annuity. Cost at 6.7%: ~£90,000.
Leaves £310,000 in drawdown for:
- Discretionary spending—travel, hobbies, gifts.
- Inheritance for children.
- Long-term flexibility.
Benefits:
- Essential spending is guaranteed for life—no longevity risk on the basics.
- Drawdown portion has full flexibility and growth potential.
- The pot does not have to last for everything; only the discretionary portion has to.
This blended approach is what most modern retirement-planning research recommends, and what most retirees end up choosing once the trade-offs are explained.
Tax-free cash—the 25% question
Most retirees have a one-off 25% tax-free lump sum option (capped at £268,275 in 2026). What you do with it shapes everything else:
- Take it all upfront to clear a mortgage, gift to children, or buy a major asset.
- Take it gradually alongside income drawdown—useful for staying in lower tax bands.
- Buy an annuity with the residual 75% after taking the 25% tax-free.
Taking it all upfront is not always optimal. Tax-free cash can be drawn in stages, and gradual withdrawal often saves more in lifetime tax than the upfront option.
Joint life and inheritance
Annuities can be set up as joint life—your spouse continues to receive a percentage (50%, 67%, 100%) of the income after your death.
Joint life annuities pay roughly 5–10% less in initial income than single life. For most married retirees, joint life is the default—protecting the surviving spouse against income loss.
Drawdown handles inheritance differently. Until April 2027, inherited drawdown is largely IHT-free and the recipient can usually take the income at their marginal rate. From April 2027, IHT applies to most inherited pensions—significantly reducing the inheritance advantage of drawdown that defined a decade of retirement planning.
Decision framework
A practical way to choose.
Almost always annuitise something if:
- You have no other guaranteed income beyond the State Pension.
- Your essential spending is more than the State Pension covers.
- You would find managing investments stressful.
- You are in good health and likely to live well past life expectancy.
Lean toward drawdown if:
- You have defined benefit (DB) pension income that already covers essentials.
- You want inheritance flexibility for the pre-2027 windows.
- You are financially literate and willing to manage the pot.
- Your pot is large enough to absorb a bad market run.
Lean toward partial annuitisation (the most common case):
- You want guaranteed income for the essentials with growth potential on the rest.
- You have a moderate-sized pot (£200k–£700k).
- You expect to live a normal lifespan (not unusually short or long).
Worked example: £400,000 pot at 65
Three scenarios for the same retiree.
Scenario A: 100% drawdown at 4%
- Annual income: £16,000 + £12,000 State Pension = £28,000.
- Pot expected to last 30+ years if returns hold.
- Risk: longevity beyond 95+ runs out the pot; market crashes in early years compound damage.
- Inheritance value: variable, depending on returns and longevity.
Scenario B: 100% annuity (single life, level)
- Annual income: £26,800 + £12,000 = £38,800 for life.
- No flexibility, no inheritance value.
- Risk: dying early means giving up a lot of the pot to the insurance company.
Scenario C: Partial annuitisation
- £100,000 to a level annuity → £6,700/year.
- £300,000 in drawdown at 4% → £12,000/year.
- Plus £12,000 State Pension.
- Total income: £30,700/year.
- Lower than full annuity, but pot retains flexibility and partial inheritance value.
The partial annuitisation outcome usually feels best to most retirees: enough guaranteed income, plus pot left for flexibility.
Where to shop annuity rates
Annuity rates vary materially between providers. Always shop. Common channels:
- Whole-of-market annuity broker (e.g. Hargreaves Lansdown, Just, Retirement Line). Free for buyers; commissions paid by the chosen provider.
- Independent financial adviser—regulated advice, takes a percentage of the pot or fixed fee.
- Direct from a provider—usually less competitive.
The difference between best and worst rates can be 5–15% on the income. For a £100,000 pot that is £300–£900 per year for life. Worth the shopping time.
What I’d actually do
A practical playbook for someone retiring with a moderate pot:
- Cover essentials with guaranteed income. State Pension + a small annuity ensure you can pay bills regardless of markets.
- Drawdown the rest. Keep flexibility for variable spending and possible inheritance.
- Stage tax-free cash over multiple years if useful for tax bands.
- Hold a cash buffer of 12–24 months of withdrawals to ride out bad market years.
- Reassess annually. Revisit the strategy each tax year, especially in down markets.
The retirement decision is not one decision. It is a series, made over years, where some are reversible and some aren’t.
For the broader retirement context, see our UK pensions and retirement guide.
Frequently asked questions
- What is a better deal in 2026 - drawdown or annuity?
Annuity rates have recovered to around 6.5–7% for a 65-year-old single life in 2026—the best in over a decade. Drawdown gives flexibility and (until 2027) inheritance benefits but carries longevity and market risk. For most retirees, partial annuitisation—buying enough annuity to cover essentials and drawing down the rest—is the most defensible strategy.
- How much income does a £500,000 pension pot give?
At a 4% drawdown rate, £20,000 a year (gross). At a 6.5% annuity rate, £32,500 a year guaranteed for life but with no inheritance value (single-life). Your State Pension on top adds another £12,000 in 2026.
- Can I switch between drawdown and annuity later?
You can move from drawdown to an annuity at any time—most providers let you crystallise drawdown funds into an annuity later. You cannot reverse an annuity once bought. This asymmetry is one reason to delay full annuitisation, especially if rates may improve.
