Pension Drawdown vs Annuity: How Each Works and What's Changing

Whichever route you take, you can usually take up to 25% of your pension tax-free, up to a maximum of £268,275. You can normally do this from age 55, rising to 57 from April 2028.
The other 75% is what this guide is about. Whatever you do with it, it gets taxed as income, just like a wage.

Quick tip: you don’t have to take all your tax-free cash in one go.

Taking it in chunks can leave more invested for longer and it can help bring down your taxable income. Just don’t take it out to sit in a bank account doing nothing. If in doubt speak to an adviser.

You hand over some or all of your pot to an insurance company. In return, they pay you a fixed income for the rest of your life. Live to 103? They keep paying. That’s their problem, not yours.

How much would you get? Rates are the best they’ve been in years. A healthy 65-year-old with £100,000 has been offered over 7.5% since the start of 2025, and recently a touch over 8%. That’s roughly £7,500 to £8,000 a year, before tax.

The good bits

• Guaranteed income for life, no matter what the stock market does
• Nothing to manage. The money just lands in your account each month
• Smokers and people with health conditions often get more, because insurers expect to pay out for less time

The not-so-good bits

• Once you buy one, you can’t change your mind or get your money back
• A flat income buys less each year as prices rise. You can get one that rises with inflation, but it starts much lower
• Unless you add extras, the payments stop when you die, even if that’s next year

Big tip: your pension provider will offer you an annuity, but you don’t have to take theirs. Shopping around for the best rate is free and can add hundreds of pounds a year, for life.

Your pot stays invested, and you take money out whenever you like.

A regular monthly amount, a one-off for a new kitchen, nothing at all for a year.

Your call.
The idea is that your investments keep growing while you spend.

The catch is that nothing is guaranteed.

If markets fall or you take out too much, too fast, the money can run out while you’re still very much alive.

The good bits

• Total flexibility. Take more when you’re young and travelling, less when you slow down
• Your money can keep growing
• Whatever’s left when you die can go to your family

The not-so-good bits

• Your income isn’t guaranteed and could run out
  A stock market crash early in retirement can do lasting damage, because you’re selling investments while they’re cheap
• It needs looking after. Someone has to choose the investments and decide how much is safe to take each year
• That last point is where many people find it helps to have an adviser keeping an eye on things, especially when markets get wobbly.

Side by side

The rules don’t stand still.

Three changes are worth knowing about.

1. Pensions are being pulled into inheritance tax

For years, drawdown had a secret superpower: money left in your pot usually passed to your family free of inheritance tax. That ends on 6 April 2027.

From then, most unused pensions will count as part of your estate.
Annuities are caught too.

If your annuity keeps paying out for a guaranteed period after you die, those payments will also count.
Don’t panic. Anything left to a husband, wife or civil partner is still free of inheritance tax, and most estates will still fall below the tax-free threshold. But if you were planning to use drawdown mainly as a way to pass money on, it’s worth a rethink.

The annuity twist: give it away while you’re alive. Here’s a little-known rule that’s about to get a lot more useful.

Regular gifts you make out of your spare income are free of inheritance tax straight away, with no limit and no seven-year wait, as long as three things are true:

• The gifts are regular, so they form a pattern, like a monthly payment into a grandchild’s savings
• They come from your income, not your savings or capital
• You can still afford your normal lifestyle afterwards

An annuity is a natural fit. It pays you the same income every month for life, so it’s easy to show a steady pattern of gifting from what you don’t need.

Turn part of your pension into an annuity, live on some of the income and gift the rest, and that money leaves your estate free of inheritance tax.
Regular income from drawdown can work too, but large or one-off withdrawals usually don’t count.

Just make sure you don’t end up beating inheritance tax and then running out of money in retirement.

The catch is the paperwork.

Your family will need to prove to HMRC after you’ve gone that the gifts met the rules, so keep a simple record each year of your income, your spending and what you gave away. This is one area where getting advice really pays off.

2. You’ll have to wait a bit longer

The earliest age you can usually dip into a personal or workplace pension rises from 55 to 57 from April 2028. If you were pencilling in an early exit, check your dates.

3. The drawdown trap for people still working

Not new, but it catches people out all the time. Once you take any taxable income from drawdown, the most you can pay into pensions each year with tax relief drops from £60,000 to £10,000. Taking just your tax-free cash doesn’t trigger it. If you’re still earning and saving, think before you dip in.

Plot twist: you don’t have to pick one

This isn’t a one-or-the-other decision. Lots of people mix and match.

For example:

• Cover the bills, invest the rest. Use part of your pot to buy an annuity that, together with your State Pension, covers the essentials like food, energy and council tax. Leave the rest in drawdown for holidays, treats and helping the grandkids.
• Drawdown now, annuity later. Stay flexible in your active 60s, then buy an annuity in your 70s when rates are usually higher because you’re older.

And if you’ve got old pots scattered around from previous jobs, round them up first. You can’t plan with money you’ve forgotten about. Our free pension tracing service can help you find them.

The 30-second test

“I just want to know the bills are paid, forever.” An annuity, or at least partly one, is worth a close look.

“I want flexibility, and I’m comfortable with some ups and downs.” Drawdown may be worth exploring, as long as you’re happy to keep an eye on it or have someone who will.

“Honestly, a bit of both.” You’re in good company. A mix is often the answer.

“I still have no idea.” Totally normal. This is one of the biggest money decisions you’ll ever make, and you only get one go at the annuity part. A free first chat with one of our advisers can help you work out which fits.

If you’re 50 or over, start with a free Pension Wise appointment. It’s government-backed and impartial, and it’ll walk you through your options.
When you’re ready for someone to look at your numbers and help you choose, book a free, no-obligation chat with one of our advisers. No pressure, no jargon, just a clearer picture.

This guide is for education only and isn’t financial advice. Everyone’s situation is different, so speak to a regulated financial adviser before making decisions about your pension.

Pension and investment values can go down as well as up, and annuity rates change daily.

Tax rules can change and depend on your circumstances.

Sources

• Tax when you get a pension, GOV.UK
• Inheritance Tax on unused pension funds and death benefits, GOV.UK
• Best annuity rates, Which?
• Pension allowances and minimum pension age, MoneyHelper
• What is the Money Purchase Annual Allowance?, Standard Life