Retirement planning · 10 June 2026

Annuity vs drawdown: which suits which UK retiree?

After a decade out of fashion, annuities are back. Gilt yields rose sharply in 2022 and stayed elevated, taking a 65-year-old level annuity rate from below 5% to roughly 7% in 2026. That changes the maths, and brings annuities back into the genuine choice set alongside flexi-access drawdown. Here's how each works, when each suits, and how to test both in the planner.

Educational only - not financial advice. Annuity rates change daily and depend on age, health, and joint-life options. The "should I annuitise?" decision is one of the larger ones in retirement and warrants a regulated adviser. Full notice on the Legal & disclaimer page.

The two shapes in one paragraph each

Drawdown leaves your pension pot invested and you take income from it each year. You decide how much, you decide when, and the pot keeps growing (or shrinking) between withdrawals. UFPLS-style drawdown gives 25% of each withdrawal as tax-free cash, with the other 75% taxed as income. The upside is flexibility and the chance of growth; the downside is that you bear longevity risk (running out of money), sequence risk (a bad early decade hurts more than a bad late decade), and the discipline of managing it yourself.

Annuity converts your pot into a guaranteed income for life. You hand the lump sum to an insurer; they pay you a fixed income every year forever (in the level case) or one that rises with inflation (in the RPI case). The upside is certainty: no longevity risk, no investment risk, the income lands every month until you die. The downside is that the capital is gone (typically no legacy) and rates are sensitive to when you buy.

The three flavours of annuity

Level: fixed nominal income forever. Highest starting rate. Real value erodes with inflation: at 3% inflation, today's £7,000 is worth around £3,900 in 20 years' time. Suits people with shorter horizons or who have inflation-protected income elsewhere (full State Pension is triple-locked).
RPI-linked (or CPI-linked): income rises with inflation each year. Starting rate is lower (roughly 4.5% for a 65-year-old in 2026), but the real income is protected. Often the safer pick for younger retirees with long horizons.
Enhanced: higher rates for medical conditions (smoking, type 2 diabetes, hypertension, heart conditions). Always disclose health conditions when getting annuity quotes; this can lift income by 10-30%.

Joint-life options pay a percentage (usually 50%, 66%, or 100%) to a surviving spouse after your death, at the cost of a lower starting income. Guaranteed-period options pay for at least N years even if you die early.

Which suits which retiree

The honest answer is "depends on which risks worry you most". A few patterns:

Drawdown suits people comfortable with investment risk who want to leave a legacy, have a long expected horizon, have other guaranteed income (State Pension, defined benefit pension) covering essentials, and are happy actively managing withdrawals (or working with a regulated adviser who does).
Annuity suits people for whom certainty matters most: those who would lose sleep watching their pot fluctuate, those without a defined benefit pension floor, and those who prefer to remove the longevity risk entirely. Also: those who simply don't want to think about it.
Neither alone suits most people. The hybrid below is what the bulk of retirees actually do.

The hybrid (and why it's the common answer)

Most retirees with a meaningful pot end up with a blend: annuitise enough to cover essentials, drawdown the rest for flex and legacy. The arithmetic works like this:

Add up your essential spending: housing, food, utilities, council tax, basic transport. Call this your floor.
Subtract guaranteed income you already have: full State Pension (£12,548 in 2026/27), any defined benefit pension. Call the gap your annuity target.
Buy enough annuity to close the gap. The rest of your pension pot stays in drawdown.

Example: essentials £24,000/yr, State Pension £12,548. Gap of £11,452. At a 6% level rate, that needs around £190,000 of pension. The remaining pot stays in drawdown for discretionary spending, big-ticket items, and legacy.

The hybrid gets you most of the certainty without giving up all of the flexibility. It's also why pension freedoms didn't kill annuities outright - they're a complement to drawdown, not a substitute.

A worked example in the planner

The Excelergy planner now supports annuity events. Try this side by side:

Set up a baseline. Current age 60, retire age 65, end age 90, pension £400,000, State Pension £12,548 starting at SPA (67), annual spending target £25,000 (today's £), inflation 2.5%, pension growth 5%, pension charge 0.6%.

Drawdown-only scenario. Run as-is. The chart shows the pension pot rising then declining as you draw; the ledger shows year-by-year tax-free cash on each withdrawal under UFPLS. Check the final balance and whether shortfall years appear.

Hybrid scenario. In the Scenario card, click Duplicate. Name it "Baseline + level annuity at 65". In the new scenario, add a crystallise event at age 65 for £200,000 (the slice you want to annuitise; the engine moves 25% to tax-free cash + 75% to the crystallised pot). Then add a Purchase annuity event at age 65, amount £150,000 (the 75% portion of the £200k crystallisation), type Level, rate 6 (for 6%). The annuity will pay £9,000/yr for life.

Compare them. Above the wealth chart, pick the baseline scenario from the Compare with dropdown. The hybrid renders as solid lines, the baseline as dashed. Watch how the pots differ: the hybrid pot is smaller (you've spent on the annuity) but the ledger shows the annuity income line covering more of your spend target, so you draw down the remaining pot more slowly. Check the late years (85+) to see which is more robust against longevity.

Real-life comparison: shift the end age from 90 to 95 in both scenarios. The hybrid degrades more gracefully because the annuity keeps paying when the drawdown pot is small or depleted.

What annuity rates depend on

Gilt yields: the single biggest factor. When yields go up, annuity rates go up. The 2022 jump from 1% to 4%+ on 15-year gilts roughly doubled annuity rates.
Age: older = higher rate (insurer expects to pay for fewer years).
Type: level > escalating > RPI-linked (in terms of starting rate).
Health: enhanced annuities for qualifying conditions.
Joint vs single: single life pays more; joint provides surviving-spouse income.
Guarantee period: longer guarantee = slightly lower rate.

Get quotes from at least three providers and use the MoneyHelper annuity comparison tool (free, government-backed). Rates can vary 10%+ between insurers for the same product.

The decision in three questions

What's the worst outcome you can't tolerate? If it's running out of money in your 90s, lean toward annuity for at least part of the pot. If it's leaving nothing to your kids, lean toward drawdown.
What's your guaranteed income floor before annuity? Full State Pension (£12,548) + any DB pension. If that already covers essentials, the case for additional annuity is weaker. If essentials are £24k and SP is £12k, the £12k gap is what's worth securing.
How much do you want to be doing in your 80s? Active drawdown management gets harder with age. Annuitising a portion now buys you the certainty that the basics are handled even if you (or your circumstances) change.

The "best" answer for most people is some combination, and the right combination depends on inputs the planner can't know. Get an adviser if this matters. But model the scenarios first - going in armed with concrete numbers makes the conversation far more useful.