Retirement is a phase of life that requires a lot of efficient preplanning. It includes choosing a suitable pension plan, target income, and annual savings amount based on your financial state, age, risk appetite, and various other parameters. The created pension pot comes handy post-retirement and helps you lead a comfortable lifestyle even after retirement. However, it is equally critical to decide how to open the pension pot and utilize it post-retirement.


Broadly, there are two ways to open and make use of the pension pot effectively. The first alternative is to buy an annual income or annuity, while the second one is to draw income regularly from the pension fund in the form of income drawdown.



An annuity is a financial product that individuals can buy when they reach their retirement age. They can use all or a part of their savings to buy an annuity from an annuity or insurance provider and become eligible to receive a fixed and guaranteed income for the rest of their life or a specific period.

There are many different types of annuities available. Some plans pay a fixed amount of money throughout your life, while escalating annuity plans include an increment in the amount over the years, catering to inflation and other economic factors. Additionally, you may choose to receive single life annuity only for yourself or joint-life annuity for yourself and your dependent. Those with health concerns can opt for a more generous annuity, called the enhanced annuity, as these individuals’ life expectancy is impaired.

The income from an annuity is fixed and guaranteed for a lifetime, in most cases. It either remains the same or increases to match inflation, but it remains unaffected by the economy and stock market conditions.

Income Drawdown


Income drawdown is a way of investing money from your pension pot in funds and generating income from these investments. It provides flexibility to the individuals as they can choose to withdraw as much or as little as they want to.

Income drawdown can either be flexi-access or capped. The capped drawdown allows you to withdraw a limited or capped income tax-free from the pension fund, while the remaining amount remains invested in a crystallized pension. On the other hand, the Flexi-access drawdown allows you to decide the frequency and amount of regular income or lump sums you want to receive.

The income from pension drawdown is not guaranteed as it varies with the returns on investments made by the fund. They have both the potential to go up or down with time. Individuals get to keep control of their pension pot; however, the earnings are affected by the state of the economy.

Differences Between Annuity and Income Drawdown

  1. Flexibility: While annuity promises a fixed amount of income post-retirement, it lacks flexibility in terms of income frequency and amount. On the other hand, pension drawdown is highly flexible and allows individuals to alter the frequency and amount of income as and when needed.
  2. Inheritance: The annuity payments can be inherited by a spouse or dependent only if you take a joint-life annuity. In case of the single life annuity, annuity payments are received only till you are alive, and the balance is kept by the insurance company after you die. However, income drawdown payments can be inherited by your nominee if you die before the age of 75, and they can receive the balance amount without having to pay tax on it.
  3. Longevity: The longevity of annuity payments can either be for the entire life, irrespective of the age at which you die, or for temporary periods like 5 or 10 years. On the contrary, income drawdown payments are subject to market risks and performances and may or may not survive for an extended period.
  4. Age Limitation: The age at which one can buy an annuity or enter into a pension drawdown is 55 years. Before 2011, individuals needed to purchase an annuity at the age of 75. However, with the removal of the clause, individuals can now continue to be in income drawdown for their entire lives, if they choose to.
  5. Tax Benefits: Overall, annuity and pension drawdown do not differ much in terms of tax benefits. Both the systems allow you to withdraw up to 25% of your pension pot tax-free, after reaching 55 years of age. The remaining income can either be used to buy an annuity program or reinvested. Any income generated on the investments is subject to income tax according to the applicable income tax guidelines.

Advantages and Disadvantages of Both

The pros of annuity include the guaranteed income for life, irrespective of the economy, and market conditions. It offers peace of mind, without having to manage funds regularly. Annuity income never runs out and offers the same or increased level of income for a long period. However, annuity plans are quite rigid and cannot be modified later in terms of frequency or amount of payments.

On the contrary, income drawdown provides the flexibility to change the frequency and amount of income as and when needed. You can withdraw as much or as little, according to your needs, and keep your pension pot in your control. However, pension drawdown is subject to market risks, and the money can entirely run out due to poor performance of the investments made out of the pension pot.

Reason to Choose Either Annuity or Income Drawdown or Combination of Both

Before making a choice between an annuity and pension drawdown, or a combination thereof, it is crucial to consider the benefits and drawbacks of both. The decision must be an informed one and suit your personal needs and preferences.

Those with higher risk appetite and looking for more flexibility can opt for pension drawdown, while the annuity is more appropriate if you are looking for guaranteed income, without getting involved in the financial management regularly. It is also possible to use some amount of the pension pot to buy an annuity and use the remaining funds for pension drawdown as and when needed.


Leave a Reply

Your email address will not be published. Required fields are marked *