Building a pension pot is only half the journey. At retirement comes a decision that shapes the rest of your life: how to turn that pot into an income. The two main options — an annuity or drawdown — pull in opposite directions, and the right answer often blends them.
Annuity: certainty
An annuity is a deal where you hand over some or all of your pot to an insurer, and in return they pay you a guaranteed income — often for the rest of your life, however long that is. The appeal is security: you cannot run out, and you need not watch markets. The trade-off is that the income is usually fixed, you give up access to the lump sum, and rates depend heavily on when you buy.
Drawdown: flexibility
With drawdown, your pot stays invested and you withdraw from it as you need. You keep control, can vary your income, and what is left can pass to your family. The risk is the mirror image of the annuity's safety: your investments can fall, and if you withdraw too fast or markets drop, you could run the pot down too soon.
Comparing the two
- Annuity — guaranteed, simple, but inflexible and irreversible.
- Drawdown — flexible and inheritable, but exposed to market and longevity risk.
Why many people use both
A popular middle path is to buy an annuity large enough to cover your essential bills — so the lights stay on no matter what — and leave the rest in drawdown for flexibility and growth. You get a guaranteed floor and freedom on top. Whatever you lean towards, this is a decision worth taking time over, and free guidance through Pension Wise is a sensible first stop.