Should I buy an annuity or use drawdown?

An annuity buys a guaranteed income and moves investment and longevity risk to the insurer, and the decision is normally permanent. With drawdown the money stays invested and under your control, and the investment risk stays with you. You can use some of each.

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What each one does

An annuity gives certainty
A known income for life, whatever markets do and however long you live.
An annuity is normally permanent
Once bought it cannot normally be unwound.
Drawdown keeps flexibility
Vary the income, stop it, take a lump sum, change the investments. What is left passes on when you die.
Drawdown keeps the risk
Markets can fall, particularly in the early years, and drawing an income from a falling fund does lasting damage. The risk of living longer than the money lasts also stays with you.
Health changes the annuity price
An enhanced or impaired life rate reflects an estimate of your own life expectancy, so disclosing conditions fully can improve the income offered.
The options cost income
Continuing a proportion to a partner, protecting the value, or increasing the income each year all reduce what you start with.

Using both

A common arrangement is to cover essential spending with guaranteed income, from the State Pension and an annuity, and to leave the rest invested in drawdown for everything else.

It does not have to be decided in one go. Buying an annuity in stages over several years spreads the timing risk and lets you take advantage of rates improving as you get older.

An annuity is normally permanent once bought, apart from a short cancellation period at the outset.

Related questions

Are annuity rates better than they were?

Rates move with gilt yields and with your age and health, so the answer changes over time and differs between people. The figure that matters is the quote you are given on your own circumstances.

What happens to an annuity when I die?

It depends entirely on the options chosen when you bought it. Without a joint life, guarantee period or value protection option, payments stop.

Can I change my mind after buying one?

There is normally a short cancellation period at the outset. After that it is permanent, so take the time to compare quotes and options before you buy.

Does drawdown mean I will run out?

It can, if you draw more than the fund can sustain. Reviewing the rate you draw every year reduces that risk.

Calculators

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Enter your pot, the income you want and a growth rate to see the age the pot runs out and the income tax on each year's withdrawal.

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Where this fits

We can work out with you how much of your income to cover with guaranteed income.

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The advisers for this subject

Sunny Bharj

Sunny Bharj

Independent Financial Adviser

Tony Springer

Tony Springer

Independent Financial Adviser

Advising through Equity & General Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Check the firm on the FCA register under number 474163.

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