Pension drawdown vs annuity options explained

Flexi-access drawdown

Flexi-access drawdown keeps your pension fund invested. You take income directly from the fund as needed. The fund remains invested, with the potential for continued growth. Any unspent fund passes to your chosen beneficiaries on death. Drawdown is flexible but subject to investment risk: poor performance combined with high withdrawals can deplete a fund faster than anticipated — a risk known as sequencing risk.

Lifetime annuity

A lifetime annuity converts your pension pot into a guaranteed income for the rest of your life. Once purchased, the income is fixed. It cannot be reversed. Annuities provide certainty — you will receive a known income regardless of how long you live or how markets perform. The trade-off is inflexibility: once purchased, the capital is gone and will not pass to beneficiaries in the same way a drawdown fund can.

Flexible Pension Annuity

A Flexible Pension Annuity seeks to combine elements of both approaches. It provides a guaranteed minimum income while retaining some participation in investment performance and some degree of flexibility. It is designed for clients who want a guaranteed floor but are not ready to commit entirely to a fixed annuity. Peter Rose APFS at Aetas Wealth advises on this area as part of the firm's retirement planning work.

The Finance Act 2026 dimension

From 6 April 2027, unspent pension funds — including funds held in flexi-access drawdown — will be brought within the scope of inheritance tax for the first time. Previously, keeping wealth in a pension drawdown arrangement was a tax-efficient estate planning strategy. After April 2027, the same fund will potentially be subject to inheritance tax at 40%. This changes the drawdown vs annuity decision for many clients and the decision about how much to draw each year and how to sequence income from different sources.

Key considerations

• Income certainty — if you need a reliable income floor regardless of markets or longevity, an annuity provides that; drawdown does not.
• Flexibility — if your expenditure is likely to vary significantly, drawdown is more appropriate.
• Longevity risk — annuities guarantee income for life; drawdown funds can run out if withdrawals are too high or returns too low.
• Investment risk — drawdown funds remain exposed to market performance; annuities eliminate this.
• Estate planning — post-April 2027, both drawdown and annuity have different IHT implications; a review of the estate position is important.
• Health — enhanced annuity rates are available for clients with certain health conditions.

Aetas Wealth is a trading style of Insight Financial Associates Limited, authorised and regulated by the Financial Conduct Authority (FRN 458421). Companies House 05054886. The value of investments can fall as well as rise. The FCA does not regulate Wills, Trusts or Tax advice. This guide is for educational purposes and does not constitute personal advice.