Drawdown or annuity? Choosing how to take your pension

When you reach retirement, your pension stops being a pot you are building and becomes an income you live on. How you turn one into the other is among the most important financial decisions you will make. The two main routes are an annuity and drawdown, and the choice is rarely all or nothing.

The security of an annuity

An annuity turns your pension into a guaranteed income, paid for the rest of your life whatever happens to markets. For peace of mind it is hard to beat. The trade-offs are flexibility and inheritance. Once bought, an annuity generally cannot be changed, and unless you add options for a spouse or a guaranteed period, the income can stop when you die. Annuity rates also move with interest rates.

The flexibility of drawdown

Drawdown keeps your pension invested while you draw an income from it. You decide how much to take and when, you can adjust as life changes, and whatever remains can usually be passed to your family. The trade-off is that nothing is guaranteed. Your money stays exposed to the ups and downs of investments, and taking too much, especially after a poor year, risks running it down too soon. Drawdown needs managing, which is where regular reviews matter.

Why a blend often works

For many people the best answer is a sensible combination. A common approach is to cover your essential spending, the bills you must always meet, with an annuity or other guaranteed income, and to keep the rest in drawdown for flexibility and growth. The right balance depends on your other income, your attitude to risk and what you want to achieve.

Because these decisions are hard to undo, they are worth getting right. We help clients look at both routes, see the effect on their income and their estate, and settle on an approach that fits their life. If you are approaching retirement, a conversation now can save a lot of second-guessing later.