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Annuity vs drawdown – which is best for retirement?

pensions & retirement

Annuity vs drawdown - which is best for retirement?

Should I choose drawdown or buy an annuity?

You can access your pension from the age of 55, but exactly how you take the income – via drawdown or annuity – is an important decision to make. 

It is a decision that will affect your retirement for years, or even decades to come. Whether you want the freedom and flexibility to choose your annual income with drawdown, or you want the security and steady income of an annuity, there are pros and cons to each.

Some people choose a combination – buying an annuity with some of their pension, and keeping the rest in a drawdown agreement - for the best of both worlds.

What is drawdown?

Pension drawdown gives you the flexibility to take whatever income you wish from your pension pot. After withdrawing your 25% tax-free allowance, you will pay income tax on the remaining funds as and when you take an income payment. A benefit is that your pension stays invested, so it could continue to grow throughout your retirement. 

Advantages of drawdown

  • Flexibility: Since drawdown allows you to take whatever income you need, it is much more flexible than an annuity. 
  • Tax: Should you die before age 75, your beneficiaries will inherit your entire remaining pension pot tax-free.
  • Potential growth: The money you do not withdraw remains invested, so your pension has the potential to grow.

Downsides of drawdown 

  • Market risk: Although your pension remains invested for the possibility of further growth, it is also possible for the value to decrease in poor market conditions.
  • Regular management: A drawdown needs to be managed carefully, otherwise you could run out of money in early retirement.

What is an annuity?

An annuity is a pension arrangement that you can buy with all or part of your pension pot. Essentially, you are buying a guaranteed income, either for the rest of your life or for a fixed period.

The main types of annuity are:

  • A level annuity that keeps your income the same every year.
  • An investment-linked annuity that gives you a guaranteed minimum income. If your investments grow, your income grows.
  • An inflation-linked annuity that increases every year with inflation.

Your annuity rate - or annual income - depends on lifestyle factors, your age, and where you live.

How do annuities compare with drawdown?

Here are the main features of annuities versus a drawdown pension.

  Annuity Drawdown
Income Guaranteed but annual income is limited Unlimited but needs managing so you do not run out of money
Reliability Can be taken for life Can run out of money early, but investments could grow your overall pot
Ease of use Simple one-time purchase Needs regular management
Flexibility You cannot get out of an annuity, but you do not have to buy one with your entire pension pot Can transfer to another pension arrangement
Inheritability Single-life plans cannot be passed on and cease on death. Joint-life plans can only be passed on and be benefited by your partner (usually 50% of the original annuity) Your beneficiaries will inherit your entire pot tax-free if you die before age 75, after which they will pay income tax
Enhanced if you have health problems? Yes No


Advantages of an annuity

  • Certainty: You will know what your income is long into the future, giving you peace of mind in your retirement.
  • You set the timescale: An annuity can either be for life and pay you an income no matter how long you live, or it can be for a set period.
  • Joint-life annuity: A joint-life annuity means you can nominate a spouse or partner to receive income payments after you die.
  • Higher income for those with health problems: If you suffer from a medical condition and have a lower life expectancy as a result, you could be entitled to a higher annuity income.

Downsides of an annuity

  • Decision for life: Once you buy an annuity there is no turning back. You cannot cancel or alter the terms, or transfer to a drawdown plan.
  • Inheritance: A single-life annuity cannot be passed on. Upon your death, your insurer will keep all the remaining funds.
  • Inflation risk: If you choose a level annuity, there is a chance inflation could take away your income’s spending power.
  • No growth: Unlike a drawdown that remains invested, an annuity has no chance for growth.

Should I choose an annuity or drawdown?

-    Reasons to choose an annuity

An annuity will give you peace of mind that you will have an income for life, or for whatever term length you choose. While you cannot then switch to a drawdown product later, it will give you a secure source of income.

-    Reasons to choose drawdown

The flexibility of a drawdown is a major benefit to this arrangement. It means you can access the funds you need to pay off your mortgage, buy a new car, or go on holiday and not worry about having to stick to an income limit.

Can I combine an annuity with drawdown?

Yes. It is possible to use some of your pension to buy an annuity and put the rest into drawdown. This gives you both the security of a guaranteed income, and the flexibility of taking the rest as and when you need it.

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The ii SIPP is aimed at clients who have sufficient knowledge and experience of investing to make their own investment decisions and want to actively manage their investments. A SIPP is not suitable for every investor. Other types of pensions may be more appropriate. The value of investments made within a SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (age 57 from 2028). Prior to making any decision about the suitability of a SIPP, or transferring any existing pension plan(s) into a SIPP we recommend that you seek the advice of a suitably qualified financial adviser. Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future.