Pension Drawdown vs Annuity: Income, Tax & Risk
Compare flexible access to an invested fund with a lifetime annuity’s contractual income. Use matching amounts and quote terms; there is no single best option for everyone.
The comparison in brief
Drawdown leaves money invested, with decisions about withdrawals, fees and risk. A lifetime annuity commits money for income under agreed terms. Some people consider different allocations to both; this page compares alternatives for the same amount.
Starting income is only one factor. Check increases, partner cover, payment timing, guarantees, existing protected benefits and health information before comparing quotes. The tool supplies no market annuity rate and does not recommend a product.
Use a provider quote or clearly chosen scenario. This tool does not retrieve market rates or price age, health, joint-life cover or guarantees. Enter the fund committed after any tax-free cash and the starting income quoted for that same amount.
Compare the same starting fund
No cash is deducted here. If you change this amount, update the quote too; income is not repriced automatically.
Enter the annual amount from a current quote, or your own hypothetical amount. There is no assumed market rate.
Only level or known fixed increases are projected. RPI/CPI-linked payment rules, caps and lags need separate modelling.
Include only income already in payment. Held constant in cash terms; no automatic full State Pension, savings or dividends.
Used only to show purchasing power. It does not change a level annuity or forecast an index-linked payment.
1–50 whole years. Assumes the annuitant survives throughout; no mortality, survivor or death-benefit projection.
Nominal return before inflation. Withdrawals match the annuity’s gross income path until the fund cannot support them. This is an assumption, not a forecast.
Enter a starting annual gross income to see the illustration. No quote or personal entitlement is assumed.
What changes between the options?
| Factor | Drawdown | Conventional lifetime annuity |
|---|---|---|
| Income | Flexible withdrawals, limited by available fund | Contracted payments while the insured life is alive |
| Capital access | Fund remains accessible subject to provider and tax rules | Purchase amount normally cannot be freely accessed |
| Investment risk | Fund can rise or fall; losses and withdrawals can exhaust it | Income is the insurer’s contractual promise, not a remaining invested pot |
| Inflation | You can change withdrawals, but that can use the fund faster | Level payments lose purchasing power; increases depend on the quote |
| Partner and death benefits | Depend on remaining fund, scheme and tax rules | Depend on joint-life cover, guarantees, value protection and contract terms |
| Management | Investment, charges and withdrawal decisions continue | Choices are largely fixed after the cancellation period |
| Tax | Taxable drawdown is combined with other taxable income | Pension annuity income is combined with other taxable income |
How the matched-income example works
Reviewed 16 October 2026. Take a hypothetical £100,000 purchase amount and £10,000 annual level income, no other income, zero inflation and zero drawdown growth. These numbers are chosen for arithmetic, not a market quote.
Both alternatives initially provide £10,000 gross and net under standard England/Wales/NI allowances. Drawdown uses £10,000 of the fund each year, leaving zero after model year 10. In year 11 it cannot meet the matching withdrawal. The annuity row continues the entered income, assuming the annuitant remains alive and the contract pays as quoted.
This does not establish a winner or a break-even year. The annuity has exchanged capital for an insurance promise; drawdown retains whatever fund remains. No mortality probabilities, discounted cashflows, survivor benefits or capital-return guarantee are valued.
A level £10,000 annual payment after twenty annual periods of 3% inflation has purchasing power of about £5,536.76 in starting-year pounds. An increasing quote has different terms and often a different starting income; the tool does not invent that quote.
Tax, cash and death benefits need separate checks
Use money remaining after any upfront cash for both alternatives. Cash entitlement depends on available allowances and scheme rules. Fully taxable annuity/drawdown payments do not also receive an automatic tax-free quarter; UFPLS and phased access are different arrangements.
Other income is assumed to be present from year one and fixed in cash terms. If State Pension starts later, use the retirement planner with confirmed amounts and start ages. PAYE deductions may differ from annual liability; this is not a tax-code forecast.
Death benefits depend on the product and circumstances, not only age at death. HMRC’s published rules bring most unused pension funds and pension death benefits into the estate for Inheritance Tax from 6 April 2027, subject to exemptions and detail. This is separate from beneficiary Income Tax. No death benefits or tax on death are calculated here.
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