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. Drawdown keeps your capital, your control and your risk. Using some of each is common.

What each one does

An annuity gives certainty
A known income for life, whatever markets do and however long you live. For covering essential spending that certainty is worth a great deal.
An annuity is normally permanent
Once bought it cannot usually be unwound, so it is the one retirement decision that is hard to revisit.
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. Living a long time is also your risk and not the insurer's.
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.

Why many people use 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. The floor stays secure whatever happens, and the flexible part can flex.

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.

Drawing an income from a falling fund in the early years does lasting damage, and no later recovery quite undoes it.

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 simply stop.

Can I change my mind after buying one?

There is normally a short cancellation period at the outset. After that it is permanent, which is why it is worth taking time over.

Does drawdown mean I will run out?

Not if the rate you draw is sustainable and reviewed. The risk is real and it is manageable. It is the reason drawdown needs reviewing every year.

Where this fits

How much of your income needs to be guaranteed is the question underneath this one. Answer that and the rest follows.

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The advisers for this subject

Sunny Bharj

Sunny Bharj

Independent Financial Adviser

Tony Springer

Tony Springer

Independent Financial Adviser

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