Drawdown or Annuity? How to Choose in 2026

Drawdown or Annuity? How to Choose in 2026

For the best part of a decade after the pension freedoms arrived in 2015, annuities were the product nobody wanted. Rates were on the floor and drawdown looked like the obvious answer for anyone with a reasonable pot.

That has changed. Annuity rates are much better than they were a few years ago, and the inheritance tax changes arriving in April 2027 have shifted the sums again. So if you are weighing up drawdown against an annuity right now, it is worth looking at it with fresh eyes rather than relying on what a friend was told in 2019.

The two options in plain English

An annuity is where you hand some or all of your pension to an insurance company in return for a guaranteed income, usually for the rest of your life. Once it is set up you generally cannot change your mind or cash it in.

Drawdown (strictly, flexi-access drawdown) keeps your pension invested. You take income as and when you want it, and whatever is left can be passed on when you die. The flexibility is real, but so is the risk: the investment decisions, and the chance of the money running out, stay with you.

What annuities are paying now

At the time of writing, a healthy 65-year-old using £100,000 to buy a level, single-life annuity could expect somewhere around £7,000 a year. In 2022 the same money bought closer to £5,000. That is a big difference over a retirement that might last 25 years.

Health matters too, and in a way people do not expect. If you smoke, have high blood pressure, diabetes or take regular medication, you may qualify for an enhanced annuity, which can pay noticeably more. It is one of the most overlooked points we come across, and it is a good reason never to simply accept the first quote from your existing provider.

You also get choices within an annuity: an income that rises each year or stays level, one that continues to a spouse after you die, and a guarantee period. Each of those lowers the starting income but protects against something.

These figures are a rough guide, we will always look to achieve the best annuity rates on the open market. It helps to shop about.

Side by side

	Annuity	Drawdown
Income	Guaranteed, usually for life	Flexible, can go up or down
Investment risk	Sits with the insurer	Sits with you
Can you change your mind?	Generally, no	Yes, and you can buy an annuity later
Passing money on	Limited, depending on options chosen	Remaining fund can pass to beneficiaries (IHT may apply from April 2027)
Inflation	Only protected if you choose an escalating annuity	Depends on investment returns
Best suited to	People who value certainty and want the basics covered	People with other secure income who want flexibility and control

The risks nobody enjoys talking about

With drawdown, the one that catches people out is timing. If markets fall sharply in the first couple of years while you are also taking money out, the damage can be very hard to repair, even if markets recover later. There is a human risk too. Having a large pot and full access to it makes it tempting to take a bit more than is sensible.

Also worth knowing: if you are still working and paying into a pension, taking taxable income from drawdown (not just your tax-free cash) cuts the amount you can pay in with tax relief to £10,000 a year. This is known as the Money Purchase Annual Allowance. Don’t be caught out - have a chat with an adviser about this today.

With an annuity, the main risk is inflation. A level income of £7,000 today will buy a lot less in fifteen years. And because it is usually irreversible, getting the options wrong at the start is not something you can fix later.

How the 2027 inheritance tax change shifts things

One of the big selling points of drawdown has always been that unused pension money could usually be passed on outside your estate for inheritance tax. From 6 April 2027 that ends for most people. Unused pension funds and most death benefits will be counted as part of your estate.

Money left to a spouse or civil partner stays exempt. But if your plan was to leave your pension untouched for your children, "keep it invested and pass it on" is no longer quite the neat answer it was.

That does not make annuities automatically better. It does mean the inheritance argument for drawdown is weaker than it used to be, and for some people securing more guaranteed income, while spending or gifting other assets, may now make more sense than it did.

You do not have to pick one

This is the bit that often gets lost. Plenty of people use both, and for many it is the most sensible answer. A common approach looks like this:

1.    Work out your essential spending: bills, food, council tax, insurance, running the car.

2.    Cover it with guaranteed income: your State Pension, any final salary pension, and an annuity to fill any gap.

3.    Keep the rest in drawdown for holidays, gifts, the new boiler and the things you cannot predict.

You can also start in drawdown and buy an annuity later. Rates generally improve with age, so some people stay flexible through their sixties and secure part of their income in their mid-seventies, when certainty starts to matter more than flexibility.

Questions worth asking yourself

•      If your pension fell 20% next year, would you still sleep at night?

•      Do you already have enough secure income to cover the basics?

•      How is your health, and what is your family history like?

•      Is someone relying on your income if you die first?

•      Do you want to leave pension money to family, and to whom?

Getting it right first time

Planning and structuring your retirement income through drawdown or an annuity can be a minefield.

At MoneyMatters, we look at your whole financial picture, search the whole market for annuity rates (including enhanced rates), model how drawdown could perform in both good and bad market conditions, and show you what a combination of the two could look like.

The aim is to help you understand your options and build a retirement income strategy that works for you. If you are approaching retirement in Norfolk, Suffolk or Essex and want to talk it through, get in touch for an initial, no-obligation conversation.

Important information

This article is for general information only. It is not financial advice or a personal recommendation, and you should not act on it without taking advice based on your own circumstances.

It reflects our understanding of UK tax rules and legislation for the 2026/27 tax year as at September 2026. Tax rules and allowances can change, including at the Autumn Budget on 28 October 2026, and how they apply to you depends on your individual circumstances.

The value of investments, and any income from them, can fall as well as rise and you may get back less than you put in. Past performance is not a reliable indicator of future results. Pensions are long-term investments and you cannot normally access them until age 55 (rising to 57 from 6 April 2028).

Annuity rates quoted are indicative only, based on published data at the time of writing, and vary with age, health, postcode, the options chosen and market conditions. Once purchased, an annuity usually cannot be changed or cashed in. Drawdown income is not guaranteed; withdrawing too much, or poor investment performance, could mean your fund runs out.

Estate Planning, Inheritance Tax Planning, and Tax Planning are not regulated by the Financial Conduct Authority.

MoneyMatters 2u UK Ltd is authorised and regulated by the Financial Conduct Authority (FRN 599247).