When you reach the age of 55 you will usually be able to access your personal pension savings. You can choose to leave your pension funds untouched to continue growing and carry on contributing to them if you wish. Should you want to access your savings you will need to decide how you would like to use them to finance your retirement. You could take your whole fund as cash but should consider the potential tax implications of this. Or you could move your pension funds to an income drawdown scheme with funds invested in the markets and withdraw an income from your pension.

Or you could opt to use your pension funds to buy an annuity to provide you with a regular guaranteed income. Depending on the size and number of pension policies you have, you may be able to consider a combination of options. When deciding which choice may be right for you there are many things to consider. Here are some of the differences and similarities between drawdown and annuities to think about:

Tax-free cash

Whether you choose to drawdown or buy an annuity, you may be able to choose to take up to 25% of your savings as a tax-free lump sum. You can spend this how you like.



With a pension income drawdown scheme the rest of your pension savings, after any tax-free cash is taken, continue to be held in investment funds. This allows you to take an income at times that suit you. The performance of these funds could go down as well as up over time. So, the amount of income taken will need to be continually reviewed to see if this is eroding the fund.


You can use one or more of your pension pots to buy a pension lifetime annuity. This is if you need or prefer the certainty of a guaranteed retirement income for life. It can provide you with the security of a guaranteed income stream for the rest of your life. But, depending on your annuity options, your income may not keep pace with inflation.

Level of income


If you choose pension drawdown there is no guarantee that the income will be enough to meet your needs. Or that it will last for the duration of your retirement.


If you choose to buy a lifetime annuity you can be sure that you will receive an income that will continue to pay out, no matter how long you live. At the time of buying an annuity you can choose to have your income level:

  • Stay the same.
  • Increase annually in line with inflation.
  • Increase by the lower of a variable amount up to 5% or the Retail Price Index (known as Limited Price Index).
  • Or a fixed amount of your choice up to 10%.

Choosing to increase your income to try and protect it against the effects of inflation may help to keep the spending power of your money. But it will reduce the first level of income you receive. An annuity is a one-off decision, and you cannot then use your annuity to buy an income drawdown in the future.



Pension drawdown can provide you with the opportunity to move money into different funds. It can also allow you to adjust the frequency and number of withdrawals you make. If you choose pension drawdown you will still have the choice to buy an annuity in the future with the remaining drawdown funds.


Once you buy a lifetime annuity it cannot be altered or cashed in after the cooling off period (30 days). You will continue to receive the agreed income for the rest of your life.



If, at the time of your death, you were taking an income from your income drawdown scheme, the amount left would form part of your estate. Your beneficiaries may have to pay inheritance tax on it if, for example, death is after age 75.


If you buy a single life annuity, your annuity payments will stop when you die. Nothing will be payable to your loved ones. If you choose a joint life annuity the second annuitant would continue to receive an income for the rest of their life, should you die before them.

If you choose to buy an annuity, you will also have the option to add extra benefits that will allow you to leave something behind. A guarantee period can be added to your annuity to ensure payments are made for a certain length of time from the annuity start date. While value protection allows you to protect all or part of the pension fund used to buy your pension annuity.

Income due under value protection, guarantee periods and joint life annuities is subject to tax. This will be at the income tax rate of the recipient if the original annuitant is 75 or over when they die. Find out more about what happens to your annuity when you die in our dedicated guide.


After tax-free cash is taken, pension drawdown and annuity incomes are both potentially subject to tax. Pension and annuity providers normally deduct tax based on your tax code, before paying you the net income.



Pension drawdown involves actively managed funds and so has associated fees and charges. Providers may charge five or six separate yearly fees. These often include set-up fees, administration charges, platform charges and dealing commission. You are also likely to need to pay charges for the investments you select in your drawdown pension plan as well as fees for advice.


The costs associated with buying an annuity are included in the annuity rate. This usually includes the administration and intermediary’s commission. Some advisers charge an advice fee instead of receiving commission.

Health issues


If you have pre-existing medical conditions this would not affect the income, you would receive from pension drawdown.


If you were to buy an annuity, you may be entitled to an enhanced annuity that would provide you with an increased income.

You could be offered an enhanced annuity if you have a health condition that could reduce your life expectancy, are overweight or smoke. The enhanced annuity would continue to be paid even if your health improved or you made changes to your lifestyle. To find out more see our guide on enhanced annuities.

Next steps

Deciding how to finance your retirement is a big decision. You may want to take advantage of a free pension guidance appointment with Pension Wise. This is a government service provided by MoneyHelper. It offers a free impartial service, to help you understand how and when you can take money from your defined contribution pension.

Pension Wise will talk you through the options available to you but will not give you a personal recommendation. For financial advice tailored to you, you may wish to get advice from an independent financial adviser.

You should consider your personal circumstances and needs when deciding which financial option(s) is most suited to you. You should be sure to take any tax implications into account.

After reaching a decision it’s important to shop around and make sure you find the right product for you. If you decide to buy a lifetime annuity, Annuity Ready can help you by comparing quotes from providers across the whole annuity market. These include Aviva, Canada Life, JUST, Legal & General, Scottish Widows and Standard Life.

If you’re ready, compare annuity quotes now.