Retirement · Explainer
Annuity or drawdown: trading flexibility for certainty
One converts a pot into a guaranteed income for life. The other keeps the pot invested and leaves you carrying the risks.
The short answer
- An annuity transfers longevity and investment risk to an insurer, for a price.
- Drawdown keeps flexibility and inheritance potential, and keeps the risk with you.
- Combining both can cover essential costs while retaining optionality.
At retirement a pension pot must be turned into income. The two mainstream routes distribute risk very differently, and the choice is rarely all-or-nothing.
What an annuity buys
An insurer accepts the capital and promises an income for life. The rate reflects long-term interest rates, life expectancy and any options selected. Once purchased it is generally irreversible, and the capital ceases to be inheritable unless a guarantee period or a spouse's pension was included.
- Level or inflation-linked: the linked version starts far lower and protects purchasing power.
- Single or joint life: a joint annuity continues to a surviving partner at a reduced rate.
- Guarantee periods: payments continue for a set number of years even after death.
- Enhanced rates: certain health conditions and smoking status can raise the income offered.
What drawdown keeps
The pot stays invested and you withdraw as required. That preserves flexibility, the potential for growth and the ability to leave the remainder to beneficiaries — while leaving you exposed to market falls, sequence risk and the possibility of living longer than the money.
Sources
- Annuities — U.S. SEC (Investor.gov)
- Taking your pension — MoneyHelper
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