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. Alternatively, you could move your pension funds to an income drawdown scheme with funds invested in the markets and withdraw an income from your pension pot.

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 pots you have, you may be able to consider a combination of options. When deciding which option may be right for you, 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 will normally be able to choose to take up to 25% of your savings as a tax-free lump sum, to spend however you like.



With a pension income drawdown scheme the rest of your pension savings, after any tax-free lump sum is taken, continue to be held in one or more 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 and the amount of income taken will need to be continually reviewed to see if this is eroding the fund.


If you need, or prefer, the certainty of a guaranteed retirement income for life, you can use one or more of your pension pots to buy a pension lifetime annuity. This provides you with the security of a guaranteed income stream for the rest of your life. However, 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 sufficient to meet your needs or 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 purchasing an annuity you can choose to have your income level stay the same, increase in line with inflation, by a variable amount capped at 5% or a fixed amount of your choosing up to 10%. Choosing to increase your income to try and protect it against the effects of inflation may help to maintain the spending power of your income but will reduce the initial level of income you receive. An annuity is a one-off decision, and you cannot then use your annuity to purchase an income drawdown in the future.



Pension drawdown can provide you with the opportunity to move money into different funds and adjust the frequency and number of withdrawals. If you choose pension drawdown you will still have the option to purchase 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 initial cooling off period (30 days) and 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 and your beneficiaries may be required to pay inheritance tax on it.


If you purchase a single life annuity, your annuity payments will stop when you die, with nothing payable to your loved ones. If you choose a joint life annuity your named spouse, civil partner or financial dependant 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 additional 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 purchase your pension annuity.

Income due under value protection, guarantee periods and joint life annuities is subject to tax at the marginal 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 therefore has associated fees and charges. Providers may charge five or six separate yearly fees which 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 which 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, and you may want to take advantage of a free pension guidance appointment with Pension Wise, a government service provided by MoneyHelper that offers a free impartial service, to help you understand how and when you can take money from your defined contribution pension pot.

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 obtain advice from an independent financial adviser.

You should consider your personal circumstances and needs when making the important decision as to which financial option(s) is most suited to you and 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 purchase a lifetime annuity, Annuity Ready can help you by comparing quotes from annuity providers across the whole annuity market including Aviva, Canada Life, JUST, Legal & General and Scottish Widows. If you’re ready, compare annuity quotes now.