Ways to access your pension: is annuity or drawdown right for you?
Written by Boring Money
29 July, 2026
There are two main ways to access your pension when you retire: 'drawdown', where you dip into your pot as and when you need it, or an 'annuity', where you swap your savings for a guaranteed income for life (or a fixed period of time). Here's how each one works, and how to figure out which suits you.
An annuity gives you certainty, meaning our income is guaranteed. Drawdown gives you flexibility, so you control how much you take and when. But which one is really best for you? In this article, we explain the basics of pension drawdown and annuities, why annuity rates have been rising and three things to think about when choosing between the two.
What is a drawdown?
Pension drawdown lets you take a flexible income from your pension while keeping the rest invested. You can take up to 25% tax-free, then withdraw money as and when you need it, taxed as income. Because your pot stays invested, it can keep growing - but its value can also fall, so your income isn't guaranteed.
Pension drawdown is a way of taking flexible income from your pension savings. It allows you to draw some money from your pot while leaving the rest of it invested - basically, not taking it all out at once. It's sometimes referred to as 'flexible income' or 'flexi-access drawdown' and is a popular way of accessing retirement savings.
When you access your pension, you can take out up to a quarter (25%) as tax-free cash or 25% of each withdrawal tax-free. The rest of it can remain invested, meaning it may continue to generate growth and boost the overall value of your pot.
However, as is always the case with investing, the value of the remaining invested part of your pension can go down as well as up - so your income is not 100% guaranteed.
As well as this, any money you withdraw after taking your 25% tax-free lump sum will be taxable as earnings in the tax year you take them. This means it will be liable for Income Tax if your total income for the year exceeds the £12,570 annual allowance.
Nevertheless, pension drawdown allows you to be flexible with your retirement income. If you need to spend more in one year, you can increase the amount of money you draw from your pot. On the other hand, if you need less in another year, you could reduce the amount you withdraw and lower your tax bill in the process.
Drawdown suits people who may have a need for an uneven income profile in retirement, combined with a capacity for volatility. People who may want to spend more in the early years of retirement, for travelling and activities, etc, but then expect that expenditure to tail off as they get older.
You need to plan carefully how to use pension drawdown as there's a risk of running out of money if you spend too much too soon. The government's MoneyHelper website has a handy calculator that can help you estimate how much income you could take out of your pension every year here.
If you're approaching retirement and considering pension drawdown, it's usually wise to discuss your options with a qualified financial adviser who can assess your situation and advise on the best course of action for you. You can search for an adviser using our directory.
What is an annuity?
An annuity is when you exchange your pension savings for a guaranteed, fixed income - either for life or a set period. Providers use your money to generate returns, often via government bonds, so rates tend to rise when interest rates rise. There are several types, including lifetime, fixed-term, investment-linked, inflation linked and enhanced annuities.
Buying an annuity is a way of exchanging your pension savings for a fixed, ongoing annual payment. You can use an annuity to secure a guaranteed yearly income for the rest of your life or for a specified period.
Annuity providers typically buy government bonds (called "gilts
" in the UK) to generate returns. If interest rates are high, this pushes these returns up. So a rise in interest rates equals a rise in annuity rates, in theory, and should translate to more bang for your buck.Annuities are sold by insurance companies and there are a range of different types on the market, including:
Lifetime | Fixed-term | Enhanced | Investment-linked | Inflation-linked | Purchased life |
This pays a guaranteed income for the rest of your life. It ensures you don’t run out of money during retirement, but it is an irreversible decision, meaning once you purchase it, you cannot change your mind. | Pays a guaranteed income for a set period of time, e.g. 10 years. It also ensures you get a lump sum at the end of the term, which is agreed upon before purchase. | Also called 'Impaired', this is aimed at those diagnosed with an illness or health problem that could reduce your life expectancy. This may mean the amount in of income you receive from your pension will increase. | This is where part of your income is guaranteed and linked to investment performance. Payments may increase and decrease monthly depending on the value of the investment. | Increases your income annually, typically in line with the typical inflation benchmark Retail Price Index (RPI) or Consumer Prices Index (CPI). This offers protection against rising costs. | A type of lifetime annuity purchased which is purchased with a lump sum of money from outside your pension. It provides a regular stream of income for the rest of your life. |
A lifetime annuity, for example, pays a guaranteed income based on the value of your pension savings for the rest of your life. A fixed-term annuity, on the other hand, pays this income over a pre-agreed length of time - typically between 5 to 10 years.
Other types of annuity come with additional features. For instance, an enhanced or impaired life annuity can provide a higher annual income for those with serious pre-existing health conditions. Some enable you to include spousal protection, whereby your spouse or civil partner receives a predetermined amount of income in the event that you pass away.
Annuities suit people who are looking for an element of certainty in their finances. They won’t necessarily purchase an annuity with their whole pension fund but may want to ensure their basic costs of living are covered by a guaranteed income. They could even choose to have a fixed level of annual increase or increases linked to the retail price index (RPI).
Drawdown vs annuity: what does each look like in practice?
Let's look at some examples of how different financial needs can affect whether drawdown or annuity is best for you.
Meet Linda and Robert. Linda and Robert are both 66 years old and recently retired with pension pots of £300,000 each. They have different retirement goals and financial attitudes, which led them to make different choices for accessing their pension savings.
Here's how their choices (drawdown for Linda, annuity for Robert) play out in practice:
Disclaimer
The above examples are presented for educational purposes only and do not constitute financial advice. The characters "Linda" and "Robert" are fictional, and their financial situations, pension choices, and outcomes are hypothetical examples created to illustrate different retirement income options. The figures, growth rates, and scenarios described do not represent guaranteed results or predictions of actual market performance. Individual circumstances vary significantly, and actual outcomes from pension drawdown or annuity purchases may differ substantially from these examples.
Why are annuity rates going up?
Annuity rates rise when interest rates rise, since providers use your pension savings to buy government bonds (gilts) and higher rates mean better returns. When the cost of living crisis pushed interest rates up, annuity rates rose with them - making annuities more attractive to retirees who want a guaranteed income.
The amount you get from an annuity is strongly connected to interest rates and also to long-term government bonds. In recent years, the cost of living crisis sent interest rates higher - and annuity rates have increased too. This means that annuities are back on the radar for many and rates have risen significantly.
According to Standard Life's Annuity Rate Tracker, average annuity rates rose to 7.62% in March 2026, and annuity rates proved resilient, rising 1.46% in the first quarter of 2026 compared with the end of Q4 2025. This is despite a volatile market backdrop. In practice, this means a healthy 65-year-old with a £100,000 pension pot could expect to receive up to £7,620 per annum.[1]
Rates do vary by age too - as of March 2026, rates for a healthy 60-year-old were 6.85% compared to 8.35% for a healthy 70-year-old, resulting in an annual income of £6,850 for a 60-year-old versus £8,350 for a 70-year-old on a £100,000 pension pot.[2]
Annuity rates have continued to improve over the last twelve months and continue to offer retirees even stronger total incomes. Almost all (98%) people consider income security as an important factor when deciding what to do with their pension pot, and a similar amount (95%) prioritise certainty of income, so it’s easy to understand why annuities are an increasingly popular choice.
Is an annuity right for you?
Just because annuity rates look attractive does not mean they're necessarily the right choice for you.
Remember that if you opt for an annuity, your pension is no longer invested and so could potentially miss out on stock market growth that it might otherwise get if you left it in drawdown instead. This is especially relevant now that many of us live for as much as two decades or more after we retire. If all goes to plan, that could leave a lot more time for your pot to grow. So an annuity, though giving you a guaranteed income, can be more restrictive.
Equally, while pension drawdown enables you to be flexible with your retirement income, leaving some of your savings invested carries an inherent risk that the value of your pot could go down.
When it comes to retirement planning, people need to consider what they expect their retirement to look like, based on their individual circumstances, and work out how best to make the most of their retirement savings. What’s becoming more appealing is the idea of a blended approach, with annuities and drawdown working in combination to meet different needs in retirement. This approach allows a portion of savings left in flexible drawdown and with the potential to grow, and the annuitised portion providing an element of guarantee to cover essential costs in retirement.
If you're deciding between pension drawdown or an annuity - or indeed, a blend of the two - it's always advisable to contact a financial adviser who can help you make the right decision. They will be able to assess your unique circumstances and retirement goals and use these to guide you towards the right choice.
Head over to our adviser directory and use the advanced filter to find ones that specialise in 'Pensions' and 'Pensions -Approaching retirement' to get started.
3 things to check before you access your pension
There are a few things you can think about first that can help you begin to understand your choices. Here are three simple things you can do to make sure you're making the right decision for you.
1. How much have you saved for retirement?
First things first, you need to know exactly how much you have saved up for your retirement to get a clear idea of what options are on the table. Beyond your State Pension, you might also have accrued significant savings from workplace pension schemes (some of which could have been forgotten about or left behind) and/or personal pension pots. It's essential to track all this information down before you decide how you're going to access your retirement savings.
2. What are your pension access options?
Once you better understand how much money you're sitting on, you should check what your current pension provider offers in terms of how you can access your funds. Some will only offer drawdown, for example, so you might want to switch providers if you decide to go with an annuity instead. You have the right to choose.
It’s also important to know that you can have both an annuity and a drawdown pension – they’re not mutually exclusive. If you're not sure which one suits your needs best, or if having both makes more sense, it's a good idea to get in touch with a financial adviser who can give you tailored advice on what suits your needs most.
3. How do you find the best annuity rates?
If you're considering buying an annuity, your current pension provider might not be offering very competitive rates - and they might not offer annuities at all!
The government-backed MoneyHelper website has a helpful and easy-to-use annuity comparison tool. This will compare the market for you and give a forecast of what you might be able to expect in terms of an annual income. You'll need to input some basic info including your age, marital status, your health, and any medical conditions.
The difference between even the main providers can be material - sometimes as much as thousands of pounds per year - so this is a super important step if you want to find the best annuity deal for you.
Got a question about pensions?
Got a burning question about pension drawdown, annuities or something else related to pensions? Check out previous reader questions and answers about pensions from Boring Money experts.
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[2] Standard Life, 2026
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