What’s the best way to take a retirement income? Broadly speaking, there are two main options for those with a pension “pot” – income drawdown and annuities.

Each option has its unique features, pros and cons. Neither is inherently superior, and suitability depends heavily on your financial goals, needs and situation.

With that said, there is a perception that individuals need to choose between them. However, in this article, we show how this is not necessary. Indeed, in many cases, a strong retirement plan can be built through a combination of the two.

What Is an Annuity?

An annuity is a financial product typically offered by an insurance company. It can be bought using funds from a pension pot, and it supplies a steady retirement income.

This income will usually run indefinitely until your death. However, annuities work differently depending on their type:

• Fixed-term. These provide a regular income for a set period.
• Lifetime annuity. Income is provided for the rest of your life.
• Enhanced annuity. Offers a higher income level to those with health problems.
• Joint life annuity. A policy you hold with your spouse / civil partner.
• Inflation-linked annuity. The income follows an inflation measure (e.g. CPI).

And more! The variety is intended to cover the various needs of people in retirement.

What Is Drawdown?

Rather than use your pension pot to buy a financial product, you could keep the money invested and withdraw when required.

This is known as drawdown. The most common type in 2025 is “flexi-access drawdown”, allowing individuals to withdraw up to 25% of their pension without facing income tax (capped at a lifetime maximum of £268,275).

Why the Rivalry?

Annuities and drawdown are often pitted against each other. Yet, they do not need to be. In fact, they can complement each other nicely in a retirement plan, depending on the individual.

The rivalry can partly be explained by the differences between annuities and drawdown:

• Productisation. Unlike annuities, drawdown does not involve committing to any particular financial product.
• An annuity provides a predictable income stream over the customer’s life, but drawdown involves more uncertainty. If markets fall, the pension’s value might also fall – potentially reducing how much can be safely withdrawn.
• Inheritance. Any unused funds in a pension pot could be handed down to beneficiaries upon death. By contrast, an annuity may only offer limited benefits to specific people – e.g. a surviving spouse.
• Drawdown grants the freedom to vary your withdrawals each month. You can (conceivably) take as little or as much as you want, depending on your expense needs. An annuity acts more like a salary, providing a regular fixed amount.
• Investment burden. An annuity provider takes full responsibility for providing the regular income. However, someone using drawdown must manage their investments and make sure the portfolio is sustainable over their retirement. Taking too much money too quickly could result in a depleted pension pot.
• Protection. If your annuity provider goes bust, your income may be protected by the Financial Services Compensation Scheme (FSCS), which typically covers 100% of annuity income from regulated providers. However, drawdown involves investing, and the value of your investments may go up and down. You may not get back what you originally invested. If so, the government will not bail you out.

A Third Way

Although differences exist between the two, there is no law requiring someone to either use their pension for drawdown or to buy an annuity. Indeed, it is perfectly possible to use both within a retirement plan.

For instance, someone might use drawdown when starting retirement. However, years later, they might use some of the funds to buy a small annuity (e.g. when interest rates are higher). Later on, they might buy another.

Another option is the ‘hybrid method,’ where someone might consider purchasing an annuity upon retirement to help ensure their essential living costs are consistently covered. The rest of their pension funds remain invested, allowing for flexible withdrawals to pay for discretionary spending – e.g. holidays.

This is not to say this is the ideal solution. The hybrid approach may not be suitable for certain people. Moreover, the balance between drawdown and annuities can vary between individuals depending on their financial goals and circumstances.

Next Steps

Are you unsure how drawdown and annuities might work in your retirement strategy? It can help to discuss your options with a financial adviser. Ask yourself:

• How important is it for you to provide an inheritance to your loved ones, and how might your pension play a role?
• Do you want flexibility over your income in retirement?
• How comfortable are you with managing investments and seeing your pension fluctuate in market value?
• How much income do you want in retirement? An annuity can offer more stability than drawdown, but withdrawals from the latter may be greater.

If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.

The value of your investments and pensions (and any income from them) can go down as well as up which would have an impact on the level of benefits available