The two main ways to take your pension
When you reach retirement and start drawing from your defined contribution (DC) pension, you face one of the most important financial decisions of your life: drawdown or annuity? The right answer depends on your circumstances, health, other income, and attitude to risk.
What is pension drawdown?
With drawdown (officially called "flexi-access drawdown"), your pension pot stays invested and you draw an income from it as and when you need it. You can take as much or as little as you like, change the amount at any time, and leave the remainder invested for growth — or to pass on to beneficiaries.
Advantages of drawdown
- Flexibility — take more in some years, less in others
- Investment growth potential — your pot can continue to grow
- Remaining funds can be inherited by beneficiaries (usually tax-free if you die before 75)
- You retain control of your capital
Disadvantages of drawdown
- Investment risk — your pot can fall in value
- Longevity risk — you could outlive your pot
- Requires active management and ongoing advice
- More complex than an annuity
What is an annuity?
An annuity converts your pension pot (or part of it) into a guaranteed income for life — or for a fixed term. You hand over your capital to an insurance company, and in return they pay you a set amount each month or year, no matter how long you live.
Advantages of annuities
- Guaranteed income for life — you can never outlive it
- Simple — no investment decisions required
- Can be inflation-linked (though this costs more)
- Can include spouse's pension and guaranteed payment periods
Disadvantages of annuities
- Irreversible — once bought, you can't change it
- No growth potential
- On death, funds typically pass to the insurer (unless you've bought guarantees)
- Poor value if you die early
💡 Annuity rates have improved significantly since 2022. Higher interest rates mean the income you get per £100,000 of pension pot is substantially better than it was — making annuities more attractive than they were for much of the last decade.
Enhanced annuities
If you have a health condition or lifestyle factors (smoker, high BMI, diabetes, heart disease), you may qualify for an enhanced annuity — paying a higher income than a standard annuity because your life expectancy is lower. Always shop around rather than taking your pension provider's default rate.
Can I do both?
Yes — and for many people, a combination works well. A common approach is to use part of your pension pot to buy an annuity that covers essential expenses, while keeping the remainder in drawdown for discretionary spending and investment growth. This gives you a secure income floor with flexibility on top.
Which is right for you?
Drawdown tends to suit people who:
- Have other guaranteed income (State Pension, final salary pension, rental income)
- Are comfortable with investment risk
- Want flexibility and to preserve capital for beneficiaries
- Have a large enough pot to sustain withdrawals through market downturns
An annuity tends to suit people who:
- Want certainty and simplicity
- Have no other significant income
- Are in good health and may live a long time
- Don't want ongoing investment management
⚠️ This decision is largely irreversible. Taking regulated financial advice before accessing your pension is strongly recommended — and for pension pots over £30,000, it's legally required before transferring out of a defined benefit scheme.