The two main ways of turning a defined contribution pension into retirement income, what actually differs between them, and the rules that apply to both. Information only — this page does not recommend either option.
Written by Phil Handley · Figures checked 31 July 2026 (2026/27 tax year) · Updated 24 September 2026
Capital at risk. The value of investments can fall as well as rise. You may get back less than you invest.
With an annuity you hand your pension savings to an insurance company and it pays you a set income. With drawdown you keep the money invested and take income out of it as you choose. The practical consequence is that an annuity moves both the investment risk and the risk of living a long time onto the insurer, in exchange for giving up access to the capital and the ability to change your mind. Drawdown keeps the flexibility and whatever is left over for your beneficiaries, and keeps both risks with you.
Neither is inherently better. They are different trades, and which trade suits a particular person depends on things this page cannot know — other income, health, attitude to risk, and what the money needs to do.
| Flexi-access drawdown | Lifetime annuity | |
|---|---|---|
| Who bears the investment risk | You do. The pot stays invested and can fall as well as rise. | The insurer does. What you receive does not depend on markets. |
| Who bears the longevity risk | You do. If you live longer than the pot lasts, the income stops. | The insurer does. A lifetime annuity pays for as long as you live. |
| Can you change your mind | Yes. You can stop, restart, change the amount, or buy an annuity later. | No. Once bought, an annuity generally cannot be changed or reversed. |
| Income certainty | None. What you can sustainably take depends on returns and how long you live. | Guaranteed. The basis is fixed at purchase — level, or rising by a set percentage or with inflation if you choose that. |
| Ongoing charges | Platform and fund charges continue for as long as the pot is invested. | None after purchase. Costs are built into the rate you are quoted. |
| What is left on death | Whatever remains in the pot passes to your beneficiaries. From 6 April 2027 it can count towards the estate for inheritance tax. | Nothing, unless you bought value protection, a guarantee period or joint life. |
| Effect on future contributions | Taking taxable income triggers the MPAA. | Buying a lifetime annuity does not trigger the MPAA. |
Whichever route you take, you can usually take up to 25% of a pension tax-free. GOV.UK puts the standard cap at £268,275, and is explicit that this is the usual limit rather than an absolute one: if you hold a protected allowance, that may increase the amount of tax-free lump sums you can take.
With drawdown the tax-free element can be taken as one lump sum or spread across several withdrawals. With an annuity it is normally taken before the rest of the pot is used to buy the income.
The other 75% is taxable as income in both cases, at your marginal rate. Annuity providers usually deduct tax through your tax code before paying you. Drawdown income is also taxed at source, and because you control the timing, withdrawals can be spread across tax years.
You are not obliged to buy an annuity from the provider that holds your pension. MoneyHelper is direct about comparing providers rather than accepting the offer your existing provider makes, because rates differ. It is also possible to use part of a pot for an annuity and leave the rest in drawdown, or to start in drawdown and buy an annuity later — though not the reverse.
This one catches people out, so it is worth stating precisely. Once you take taxable income from a defined contribution pension, the amount you can pay into money purchase pensions each year with tax relief is capped at the £10,000 money purchase annual allowance (2026/27, GOV.UK).
For most people that is a reduction from the £60,000 annual allowance, but £60,000 is the standard figure rather than a universal one — tapering reduces it for higher earners. The MPAA also applies specifically to money purchase contributions; if you are still building up benefits in a defined benefit scheme, a separate alternative annual allowance applies to those.
Taking only the tax-free cash does not trigger it. Nor does buying a lifetime annuity. Taking taxable drawdown income does. If you are still working and paying into a pension, that difference can matter more than the income itself.
Worth knowing: the MPAA is not reversible. Once triggered, it applies for the rest of your life.
With drawdown, whatever remains in the pot can pass to your beneficiaries. MoneyHelper states that where death occurs before age 75, remaining funds can typically be inherited tax-free, subject to the lump sum and death benefit allowance — £1,073,100 for most people in 2026/27. That “tax-free” refers to income tax: for deaths on or after 6 April 2027, most unused pension funds also count towards the estate for inheritance tax, as the note below explains.
A lifetime annuity normally stops paying when you die. That can be changed at the point of purchase, at the cost of a lower starting income, through a guarantee period, value protection, or a joint life basis that continues paying a proportion to a dependant.
Finance Act 2026 changes how pensions are treated when someone dies. If the pension holder dies before 6 April 2027, the current rules apply, even if the money is paid out after that date. For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will count towards the value of the estate for inheritance tax.
GOV.UK says most estates will continue to have no inheritance tax to pay after 6 April 2027. Whether an estate does depends on its total value, the allowances that apply and who inherits.
Checked 24 September 2026. Sources: GOV.UK: Inheritance Tax on unused pension funds and death benefits; GOV.UK: Technical note, Inheritance Tax on pensions; MoneyHelper: What happens to my pension when I die?.
"Annuity" covers several different products, and the differences between them are larger than most people expect:
Drawdown has an ongoing cost that an annuity does not: the pot stays invested, so platform charges and fund charges continue for as long as it does. Those charges vary considerably between providers and the gap compounds over a retirement.
This page sets out how the two options work. It does not tell you which to choose, because that depends on circumstances no website knows.
If you are 50 or over, Pension Wise from MoneyHelper offers a free, impartial government-backed appointment covering your options. For a recommendation specific to your situation, that requires regulated financial advice. For a sourced summary of what Martin Lewis and MoneySavingExpert publish on the same choice, see what Martin Lewis says about annuity or drawdown.
Every figure on this page was checked against the following on 31 July 2026: