When you reach retirement with a defined contribution pension pot, you face one of the biggest financial decisions of your life: turn it into a guaranteed annuity income, keep it invested and use flexible drawdown, or do both. There is no single right answer — the choice depends on how much certainty you need, how long you might live, and what you want to leave behind. This guide explains the trade-offs so you can frame the decision.
Guarantee versus flexibility
An annuity swaps your pot (or part of it) for an income that is paid for the rest of your life, no matter how long you live or what markets do. The certainty is the whole point: the income lands every month regardless. The cost of that certainty is flexibility — once you buy an annuity, the capital is gone. You can’t change your mind, take a lump sum for an emergency, or pass the pot to your family.
Drawdown keeps your pot invested and lets you take income as and when you want. You stay in control, can vary withdrawals year to year, and whatever is left passes to your beneficiaries. The trade-off is that you carry the investment and longevity risk yourself.
Longevity risk
Longevity risk is the danger of outliving your money. With drawdown, if you live longer than expected or markets fall early in retirement, the pot can run dry while you still need income. An annuity removes that risk entirely — it is, in effect, insurance against living too long. The breakeven age is the key figure: the age at which the income an annuity would have paid overtakes what drawdown can sustainably deliver. Live well past breakeven and the annuity wins; die before it and drawdown (with its inheritable residue) usually comes out ahead.
Inflation: level versus RPI
Annuities come in two main shapes. A level annuity pays a fixed amount that never changes — it starts higher, but inflation erodes its real value every year. An RPI-linked (escalating) annuity rises with inflation, protecting your purchasing power, but it starts considerably lower; it can take a decade or more to catch up with the level option in cash terms. Drawdown sits in between: you can increase withdrawals to match inflation, but only if the pot and its returns allow.
Joint-life and the Open Market Option
If you have a partner, a joint-life annuity continues paying a percentage (often 50% or 100%) to your survivor after you die — important protection that a single-life annuity does not provide, at the cost of a lower starting income. And never accept the first quote from your own pension provider. The Open Market Option lets you shop the whole market for the best rate, and disclosing health conditions or lifestyle factors (an enhanced annuity) can lift your income meaningfully.
Mixing the two
The decision is rarely all-or-nothing. A common approach is to annuitise enough to cover essential, non-negotiable spending — housing, bills, food — so those are guaranteed for life, then keep the rest in drawdown for flexibility, discretionary spending, and inheritance. Your State Pension already acts as a built-in inflation-linked annuity, so factor it in before deciding how much more guaranteed income you actually need.
Tax treatment
Both routes are taxed the same way on the income side: after your 25% tax-free entitlement, every pound of annuity income or taxable drawdown is income tax at your marginal rate, alongside your State Pension and any other income. The difference is timing and control — drawdown lets you manage withdrawals to stay within tax bands, while an annuity locks in a fixed taxable amount each year.
An important caveat on rates
Annuity rates track gilt yields and move daily, so any figure you see in a calculator or article is indicative only. Always get a live, personalised quote through the Open Market Option before committing — and remember this is general information, not financial advice; for a decision this large, consider regulated advice.
To compare how long your pot lasts under drawdown against the guaranteed income an annuity buys, use our Annuity vs Drawdown Calculator.