Pension drawdown means keeping your pension pot invested and taking flexible withdrawals as income. An annuity means exchanging your pot (or part of it) for a guaranteed income for life from an insurer. Drawdown offers flexibility and ongoing investment growth but carries market and longevity risk. An annuity provides certainty and cannot be outlived, but is largely irreversible and fixed. In mid-2026, annuity rates are near 18-year highs — making annuities unusually attractive compared with the low-rate era. Many retirees use a combination of both.
The drawdown vs annuity decision is one of the most consequential financial choices anyone makes, and unlike most financial decisions, it's largely irreversible. Understanding both options clearly — including the current rate environment — is essential before committing.
Pension Drawdown: How It Works
Your pension pot remains invested after you start taking income. You withdraw what you need, when you need it. The remaining pot continues to grow (or fall) with investment returns. You have complete flexibility over the amount and timing of withdrawals.
Advantages:
- Flexibility — increase, decrease, or stop withdrawals as circumstances change
- Continued investment growth — remaining pot can grow significantly over a long retirement
- Ability to pass unused funds to beneficiaries (currently largely IHT-free before age 75)
- Capital preserved for large one-off needs (care costs, home modifications)
Risks:
- Sequencing risk — poor returns in early retirement, combined with withdrawals, can permanently damage the pot's longevity
- Longevity risk — you might outlive the pot
- Behavioural risk — taking too much in good years, too little in bad
Annuities: How They Work
You use your pension pot (or part of it) to buy a regular income from an insurance company, paid for the rest of your life — regardless of how long you live. Once purchased, the income is guaranteed and cannot fall.
Types of annuity:
- Level annuity: fixed income throughout life — simple but eroded by inflation
- Inflation-linked annuity: income rises with CPI or RPI — provides better purchasing power protection but lower starting income
- Joint life annuity: continues at a specified level (typically 50-100%) to a surviving partner after first death
- Enhanced annuity: higher income for those with reduced life expectancy due to health conditions — always apply for this if any qualifying conditions apply
Annuity Rates in 2026: Near 18-Year Highs
In mid-2026, annuity rates are at their most attractive levels since approximately 2008. A healthy 65-year-old with a £100,000 pension pot can currently purchase a single-life level annuity generating approximately £6,500-£7,200/year — compared with around £4,500/year at the rate lows of 2021.
This represents a significant improvement in value. For anyone who has been deferring the annuity decision hoping for "better conditions," current conditions are genuinely among the better ones available in recent memory.
Which to Choose — or How to Combine
Most retirees benefit from a combination rather than a binary choice:
- Annuitise the "floor" — use part of the pot to buy an annuity covering essential spending (rent, utilities, food). This guarantees the basics regardless of market performance.
- Keep the remainder in drawdown — providing flexibility, growth potential, and capital for discretionary spending and large one-off needs.
This approach combines annuity certainty with drawdown flexibility, avoiding the all-or-nothing choice. The appropriate split depends on existing guaranteed income (State Pension, DB pension), expenses, risk tolerance, and health.
Before making this decision, a free Pension Wise appointment is strongly recommended — available to all over-50s with a DC pension through MoneyHelper's Pension Wise service.
Frequently Asked Questions
Can I change my mind after buying an annuity?
Generally no — there's a 30-day cooling-off period after most purchases, but once this passes, the annuity is permanent and irreversible. This is why the decision deserves careful consideration, ideally with a financial adviser.
What is an "open market option"?
Your pension provider offers an annuity, but you're not obligated to accept it. The "open market option" means shopping around all annuity providers — which typically produces 10-20% better rates than accepting the default. Always shop around. A financial adviser or specialist broker can access the whole market.
For current annuity rates across providers, Hargreaves Lansdown's annuity comparison shows live rates across different ages and pot sizes.
