April 1, 2026
How you take pension income is one of the most important financial decisions you will make. Get it right, and your retirement can be everything you planned for. Get it wrong, and you may face an income that is too low, runs out too early, or is simply not structured in the way that suits your life.
The two main options are pension drawdown and an annuity. Each has its pros and cons, and you do not have to pick just one. Many people use a combination of both.
This guide explains what each option means. It compares them on income, flexibility, inheritance, tax, and risk. You will also find key questions to help you decide.
Pension drawdown, sometimes called flexi-access drawdown, became widely available following the Pension Freedoms legislation in April 2015. This change allowed people with defined contribution pensions to access their savings flexibly, rather than having to buy an annuity. Since then, drawdown has become the most popular way for UK retirees to take pension income, with over 90% choosing this option.
The main advantage of pension drawdown is that it lets you keep your pension pot invested and take income from it whenever you need. Instead of turning your pot into a fixed income, you stay in control of how much you withdraw and when.
You can take up to 25% of your pension pot as a tax-free lump sum once you reach the minimum pension age, which is currently 55 and will rise to 57 in April 2028. The rest stays invested, and any income you take from it is taxed at your usual income tax rate.
An annuity is an insurance product you buy from an insurance company using all or part of your pension pot. In return, you receive a guaranteed income for the rest of your life or for a fixed period if you choose a term-certain annuity. Once set up, the income continues regardless of how long you live or how investment markets perform.
There are several types of annuity:
Annuity rates have improved dramatically since the low point of 2021 and are currently at their highest levels in over a decade. As a guide, a standard single-life level annuity for a 65-year-old with a £100,000 pension pot is likely to generate an indicative income of approximately £6,400 to £7,200 per year, depending on the provider. That is more than 50% higher than in 2021.
If you have waited to buy an annuity or are now approaching retirement, current rates are much more favourable than for most of the last decade. However, rates will follow base rates down if the Bank of England cuts rates further, so the timing of any purchase is worth considering carefully.
Always use the open market option when buying an annuity. You are not obliged to buy from your current pension provider, and shopping around can make a significant difference to the income you receive.
| Pension Drawdown | Annuity | |
| Income type | Flexible, you choose how much and when | Guaranteed fixed income, or index-linked if chosen |
| Income security | Depends on investment performance | Guaranteed for life, regardless of how long you live |
| Investment risk | Pot can fall in value | No investment risk once purchased |
| Flexibility | Withdraw more or less at any time | Income is fixed at the outset |
| Inheritance | Remaining pot can be passed to the beneficiaries | Usually ceases on death, unless joint life or guarantee period |
| Reversibility | Reversible | Irreversible |
| Management required | Yes | None, income is paid automatically |
| Health impact | Not affected by health | Better rates available for poorer health, known as an enhanced annuity |
| Inflation protection | Depends on investment growth and withdrawal rate | Available via index-linked annuity, but reduces starting income |
| MPAA triggered | Yes, once any taxable income is taken | No |
| IHT from April 2027 | Unused pot included in estate | Generally, no ongoing pot; joint life or guarantee terms may apply |
Key points: Drawdown keeps your pension invested and gives you flexible access, but your income is not guaranteed, and your pot can run out. An annuity exchanges your pension pot for a guaranteed income for life. It’s secure and simple, but irreversible and inflexible. Annuity rates in 2026 remain at their highest levels in over a decade. From April 2027, most unused pension funds, including drawdown pots, will be brought into scope for Inheritance Tax. A blended approach, using part of your pension to buy an annuity and keeping the rest in drawdown, is often the most practical solution.
Important: legislation in progress. In the October 2024 Autumn Budget, Chancellor Rachel Reeves announced that from 6 April 2027, most unused pension funds and death benefits will be brought within a person’s estate for inheritance tax purposes. The legislation is currently passing through Parliament, and the details are still being finalised. This is a fast-moving area, and the information below reflects the current position as of April 2026. We strongly recommend taking independent advice before making any decisions based on these changes.
Until now, pension pots, including funds held in drawdown, have sat outside of your estate for Inheritance Tax purposes. This has made pensions an attractive estate planning strategy. It especially appeals to those with other income who have not needed to draw heavily on their pension.
From April 2027, this will change. Most unused pension funds and pension death benefits will count towards your estate when Inheritance Tax is calculated. The standard nil-rate band of £325,000, plus the £175,000 residence nil-rate band where applicable, will still apply. Any pension passed to a spouse or civil partner remains exempt. But if estates exceed those thresholds, unused pension funds may be subject to Inheritance Tax at 40%.
For those who die after age 75, beneficiaries may also face income tax on withdrawals from inherited pension pots. In some scenarios, the combined effective rate can reach up to about 67%.
What does this mean for the drawdown versus annuity decision? It reduces, but does not eliminate, the inheritance advantage that drawdown has previously had over an annuity. If passing pension wealth to beneficiaries matters to you, it is now even more important to review your overall retirement and estate plans.
There is no single right answer. It depends on your circumstances, other income sources, attitude to risk, health, and what you want from your retirement. Here are the key questions to consider.
For many people, the most practical solution is not a drawdown or an annuity; it is a combination of both. A blended approach uses part of your pension pot to buy an annuity to cover your essential monthly costs, such as housing, bills, and food. The rest stays in drawdown for flexible spending, emergencies, and extra income.
This set-up gives you a guaranteed income base, so you don’t have to worry about market ups and downs in your daily finances. You still keep the flexibility and growth potential of drawdown for the rest of your money. You can also delay buying an annuity, which might let you get a better deal, and adjust the balance between the two as your needs change.
You do not have to split your pension all at once. Some people purchase a partial annuity when they retire, then move more drawdown funds into an annuity in their 70s or 80s for greater certainty and less investment management.
| Key numbers – 2025/26 tax year | |
| Minimum pension age | 55, rising to 57 in April 2028. |
| Tax-free lump sum | Up to 25% of your pot, subject to Lump Sum Allowance of £268,275. |
| Money Purchase Annual Allowance | £10,000 per year, once taxable drawdown income is taken. |
| Standard Annual Allowance | £60,000 per year, before MPAA is triggered. |
| Indicative annuity rate, 2026 | £6,400-£7,200/year for a £100,000 pot, single life, age 65, level, no guarantee. |
| IHT nil-rate band | £325,000, plus £175,000 residence nil-rate band, where applicable. |
| Pension IHT change | From 6 April 2027, most unused pension funds are included in the estate for IHT. |
| Personal Allowance 2025/26 | £12,570. Income above this is taxed at the marginal rate. |
These figures are correct at the time of writing, April 2026, but are subject to change. Pension and tax legislation changes frequently, so always check the latest figures with your adviser or at gov.uk.
With pension drawdown, your pension pot stays invested, and you can choose how much income to take and when.
With an annuity, you exchange your pension pot, or part of it, for a guaranteed income that continues for life, no matter how investments perform. Drawdown offers flexibility but no guaranteed income. An annuity provides security, but you cannot change it once it’s set up.
Neither is better. The right choice depends on your situation. An annuity is good for people who want a guaranteed income and cannot risk their income dropping. Drawdown is better for people who want flexibility, have other guaranteed income sources, are comfortable managing investments, and want to leave money to beneficiaries. Many people use a combination of both, and independent financial advice is strongly recommended before making this decision.
Annuity rates in 2026 are still much higher than the low rates from 2016 to 2021. For example, a standard single-life level annuity for a 65-year-old with a £100,000 pension pot now pays about £6,400 to £7,200 per year, depending on the provider and options. Enhanced annuities for people with health conditions can pay much more. Always shop around and compare quotes from multiple providers.
Yes. You can take up to 25% of your pension pot as a tax-free lump sum, subject to the Lump Sum Allowance of £268,275 in 2025/26, and place the remaining 75% into drawdown. Alternatively, you can take smaller lump sums over time using Uncrystallised Funds Pension Lump Sum, where 25% of each withdrawal is tax-free, and 75% is taxable as income.
Once you start taking any taxable income from your pension through drawdown, your annual allowance for future pension contributions drops from £60,000 to £10,000. This is called the Money Purchase Annual Allowance. It does not apply if you only take your tax-free cash without triggering drawdown income. If you plan to continue working and contributing to a pension while drawing income, the MPAA is an important consideration.
From 6 April 2027, most unused pension funds, including drawdown pots, will be included in your estate for Inheritance Tax purposes. This changes the picture for people who have kept money in drawdown specifically for inheritance planning. If passing wealth to beneficiaries is important to you, it is worth reviewing your strategy with a financial adviser now. The rules are still being finalised, but the window to plan around these changes is narrowing.
Independent pension advice from Beaumont Wealth
The drawdown versus annuity decision is one of the most consequential choices you will make in retirement. For most people, it deserves more than a quick read of a comparison guide. At Beaumont Wealth, our independent pension advisers will take the time to understand your financial position, including your other income, health, family situation, and your goals, to help you build a retirement income strategy that is right for you. We are Chartered, fully FCA-regulated, and independent, which means we are not tied to any provider, and our advice is always in your best interests.
Book your free initial consultation here or call us to speak with an adviser today.
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