Annuity Vs Drawdown

The Office for National Statistics revealed in 2019 membership of Defined Contribution (DC) pension schemes exceeded 22 million policies. Annuity and drawdown are two options open to you when you want to access or withdraw from your DC (defined contribution) pension pot but there are differences.

The main difference between an annuity and drawdown is that an annuity guarantees the same payment for a fixed term while drawdown allows you to access your pension at any time and draw as much money as you need.

Before the pension freedoms 2015, over 90% of pension savings were used to buy annuities.  However, drawdown sales are now twice that of annuity sales.

Year Number of Annuities Value of Annuitites (£000) Number of Drawdown Value of Drawdown (£000)
Apr 2018 – Sep 2018  37,990  2,342,790 95,380 14,851,466
Oct 2018 – Mar 2019  35,987  2,181,929 98,328 13,591,829
Apr 2019 – Sep 2019  38,381  2,381,600 101,625 14,721,069
 Oct 2019 – Apr 2020  31,138  1,848,102 95,493 13,499,680

Source: Financial Conduct Authority

With more people opting for drawdown understanding the difference between annuities and drawdown is only part of the picture. You need to be clear on how all your assets work together to provide you with the income that you need to support your lifestyle for the rest of your life. Our expert financial planners based in the UK can provide advice on pension and retirement planning, giving you peace of mind everything is going to be ok.

What is pension drawdown?

Pension drawdown is one way of accessing your pension funds from age 55 onwards. You can access 25% of your pension pot tax free and will pay income tax on the remaining 75% at your marginal rate.

Advantages of Drawdown Disadvantages of Drawdown

Investment potential – After you reach retirement age, your pension account has the potential to grow even more.

No guarantees – You have to make sure that you don’t run out of money.

Control – You might adjust how much you withdraw and purchase an annuity at a later date if needed, making it more flexible than an annuity.

Investment risk – The value of your pot can go up or down as it remains invested.

For more information on drawdown please check out our guide ‘What is pension drawdown?’

What is a pension annuity?

You buy an annuity from an insurance provider using money from a defined contribution pension and they pay you an agreed amount over a specific period of time. Once you buy an annuity you can’t change your mind. It’s best to shop around because insurers will offer you different rates based on what they believe the level of risk is.

Advantages of Annuities Disadvantages of Annuities

Guaranteed – You get a guaranteed annuity income for the rest of your life.

Inflexible – There are no refunds when you buy one.

Simple – You know exactly how much you’re going to get from day one.

Rigid – Your pot has no chance to grow as it has no investment value.

Customizable – There are lots of options to make sure you get the most out of your annuity

It dies with you – You have to get the right annuity for you otherwise your loved ones won’t receive anything when you pass away.


For more information please check out our guide ‘What is an annuity pension?Annuity vs drawdown explanation

What are the differences between an annuity and pension drawdown?

The way we think about annuities and pension drawdown at Joslin Rhodes makes them fundamentally different options. We use the ‘box’ and ‘barrel’ analogy to explain what they are and how they work.

Annuity – The ‘Box’

An annuity pays out regular monthly income for the rest of your life or agreed term. Imagine a secure box of cash that paid you out a fixed amount each month. Typically used to cover fixed costs e.g. utilities.

The annuity is like a box because it’s secure and guaranteed. You can’t ever open the box and change the amount.

Drawdown – The ‘Barrel’

Drawdown is a method of withdrawal typically used to fund large purchases. Think of it as a barrel with a tap at the bottom that you can access and open anytime.

The key differences between pension drawdown and annuity are related to:

  • how flexibly you’d like to access your money
  • your appetite for investment risk
  • whether you hope to leave an inheritance, known as a death lump sum
  • how you perceive your pension pot
Annuity Drawdown

Access and Flexibility

You can’t access your full pension pot, you just receive guaranteed income payments

You can access any amount of your retirement income, as and when you want to


You receive a regular, predictable income for the rest of your life, or an agreed term

You have no guaranteed income and need to actively manage your money


You are guaranteed a certain income – you have zero investment risk

The value of your pension pot may go up or down, depending on your investments


Your spouse may be able to continue to receive payments after you die, until their death, but usually there is nothing to pass on to children

When you die, your remaining pension pot can be distributed to your loved ones in the form of a death lump sum


You are more likely to perceive your pension as ‘income’ and be happy to spend it

You may perceive your pension as ‘savings’ and be scared to spend them


Annuity income is treated as employment income so you pay income tax if your total income is above the income tax threshold.

Income drawdown taken directly from the pension fund is also treated the same as employment income. So if you take all your remaining funds in one go, that (along with any other taxable income you had) would state what income tax rate you pay on the fund.

Payments are made with or without ‘proportion.’ When you die, if you choose “with proportion,” a percentage of your next income payment is paid. It’s based on how many days have passed since your last payment and the date of your death.

You don’t have to choose one or the other. It’s possible to combine a box and a barrel approach. For example, splitting your pension pot equally between the two, giving you a balance of regular income alongside flexible access to larger sums if needed.

You should always seek financial advice before making a final decision.

Is an annuity better than a lump sum?

A lump sum is when you withdraw a specific amount of money from your pension pot in one go.

An annuity is different to a tax-free lump sum. You might use your annuity income to cover your foundation costs, things like your mortgage and insurances.

Taking a lump sum gives you the option to make one-off large purchases or go on holidays that you normally couldn’t afford. It’s always worth speaking to an independent financial adviser to find out what’s best for you and your circumstances.

To find out more about lump sum’s check out: Is my pension lump sum taxable?

When you buy an annuity, the provider will tell you that you have a 30-day cooling-off period. You can change your mind at this time and tell the annuity provider, usually in writing, that you don’t want to go ahead.

That’s not the same as cashing in your annuity. If you’ve passed your cooling off period it’s highly unlikely that you’ll be able to cash in.

Annuity, Drawdown or Cash?

There’s no one size fits all answer to whether annuity, drawdown or tax free cash lump sum is the best way for you to go.

It always comes down to your unique circumstances and most importantly what you want from life now and in the future. Once you’ve got a firm understanding of what you want we’ll be able to find the best approach for achieving that you can get in touch below to find out more. For further reading on potential ways, you can access your pension you can visit. Some of the topics below…


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