Since Pension Freedoms were introduced in 2015, most UK retirees no longer have to buy an annuity. But having the choice doesn't make it easier — it makes it more important to get right. The decision between drawdown (keeping your pension invested and withdrawing flexibly) and an annuity (trading your pension pot for a guaranteed income) is one of the most significant financial decisions you'll ever make.
How Pension Drawdown Works
With income drawdown (flexi-access drawdown), your pension pot stays invested in the market. You withdraw amounts as needed — subject to Income Tax at your marginal rate. The pot can continue to grow, you maintain flexibility, and any unused funds pass to beneficiaries (normally free of IHT if you die before 75). The risk: if markets fall, or you withdraw too much, the pot may not last.
- Flexibility to vary income year to year
- Pot can continue to grow
- Unused funds pass to beneficiaries
- Risk: pot can run out if withdrawals are too high or returns poor
- Requires ongoing investment decisions
How Annuities Work
An annuity converts your pension pot into a guaranteed income for life (or a fixed term). Once purchased, it cannot be reversed. Rates depend on your age, health, pot size, and prevailing gilt yields. In 2026, with interest rates higher than pre-2022, annuity rates are more attractive than they were — a 65-year-old with £100,000 might secure £6,000–£8,000/year guaranteed income.
- Guaranteed income for life — no risk of running out
- Irreversible — once bought, cannot change
- Enhanced annuities for health conditions can pay significantly more
- Joint life annuity continues payment to surviving spouse
The 2026 Context
Annuity rates have improved significantly from the historic lows of 2020–2021. Higher gilt yields (on which annuity rates are based) mean better value for those who want guaranteed income. Those who deferred buying an annuity in 2020–2021 may find the 2026 market considerably more attractive.
The Hybrid Approach
Many retirees use both: annuitise enough to cover essential expenses (rent/mortgage, food, utilities), then use drawdown for discretionary income (holidays, luxuries, gifts). This captures certainty for necessities and flexibility for the rest. The 'floor and upside' model is endorsed by many independent financial advisers.
Getting Advice
This decision is complex enough that professional advice is genuinely valuable. The Money and Pensions Service (MAPS) offers free Pension Wise guidance for over-50s with defined contribution pensions. An independent financial adviser (IFA) can model different scenarios based on your specific health, assets, and goals.
Can I change from drawdown to an annuity later?
Yes — you can buy an annuity from your remaining drawdown pot at any time. Many people 'phase' into an annuity as they age and the security of guaranteed income becomes more important.
What happens to an annuity if I die early?
Basic annuities stop at death. To protect against early death, choose a 'guaranteed period' (e.g., 10 years) or a joint life annuity that continues to a spouse at a reduced rate. These options reduce the annual income but provide protection.
- pension drawdown
- annuity
- retirement
- UK
- 2026
- pension freedom