Annuity or drawdown? How to turn your pension pot into a retirement income

For most people saving into a workplace or personal pension today, the pot they build up is a defined contribution (or "money purchase") pension. Unlike a final salary scheme, it does not come with a guaranteed income attached. When the time comes to stop working, you have to decide how to turn that pot into money you can live on. If you have changed jobs over the years, you may have more than one pot, and our guide to finding lost pensions explains how to track them down first.

Since the "pension freedoms" reforms of 2015, UK savers have had far more choice than they used to. That flexibility is welcome, but it also means the decision carries real weight. Choose badly and you could pay more tax than necessary, run out of money too early, or lock yourself into an income that does not suit your circumstances.

This guide explains the main options, how they work, and the questions worth asking before you commit.

When can you access your pension?

The normal minimum pension age is currently 55. It is legislated to rise to 57 from 6 April 2028, so anyone planning to retire in their mid-fifties should check exactly when they will be able to draw on their pot. Some people have a "protected" pension age under their scheme rules, so it is worth asking your provider.

There is no obligation to take money out at that age. Many people leave their pension invested for longer, and you do not have to stop working to access it.

The tax-free lump sum

Whichever route you choose, most people can take up to 25% of their pension pot tax-free. Since 6 April 2024 the total amount of tax-free cash you can take across all your pensions has been capped by the Lump Sum Allowance, currently £268,275. Most savers will not get near that limit, but those with larger pots should check gov.uk for the current figure, as allowances can change at any Budget.

The remaining 75% is taxed as income at your marginal rate when you withdraw it, alongside any other income you have, such as earnings or the State Pension.

Taking the full tax-free cash in one go is popular, but it is not always the best move. Money taken out of a pension and left in a current account loses its tax-efficient wrapper and may lose value to inflation. It is worth having a clear plan for what you will do with it, such as using your annual allowance in an ISA.

Option 1: Buying an annuity

An annuity is an insurance product. You hand over some or all of your pension pot to a provider, and in return it pays you a guaranteed income, usually for the rest of your life.

The main advantages:

• Certainty. You know exactly what you will receive, however long you live and whatever happens to stock markets.
• No investment decisions. Once it is set up, there is nothing to manage.
• Protection against outliving your money. A lifetime annuity keeps paying until you die.

The main drawbacks:

• It is usually irreversible. Once bought, a standard annuity generally cannot be cashed in or changed.
• Inflation risk. A "level" annuity pays the same amount every year, so its buying power falls over time. An escalating or inflation-linked annuity protects against this, but starts at a lower income.
• Limited inheritance. Unless you build in extra features, payments may stop when you die.

You can tailor an annuity in several ways, including a joint-life annuity that continues paying a spouse or partner after your death, or a guarantee period that keeps payments going for a set number of years even if you die early. Each feature reduces the starting income, so it is a trade-off.

If you have health conditions or certain lifestyle factors, such as smoking, you may qualify for an enhanced annuity, which pays more because the insurer expects to pay out for a shorter period. Always disclose your health honestly when getting quotes.

Annuity rates depend heavily on interest rates and gilt yields. They improved noticeably as interest rates rose from 2022 onwards, having been very low for much of the previous decade, but they move over time and differ widely between providers.

Do not simply accept the annuity offered by your existing pension provider. You have the right to shop around on the open market, and the difference between the best and worst quotes can be significant.

Option 2: Flexi-access drawdown

With drawdown, your pension stays invested and you take money out as and when you need it. You can usually take your tax-free cash up front and then draw a taxable income from the rest, either regularly or as one-off withdrawals.

The main advantages:

• Flexibility. You can vary your income, for example taking more in early retirement and less later on.
• Growth potential. Your money remains invested and could continue to grow.
• Inheritance. Any money left in your pot when you die can usually be passed on, although from 6 April 2027 most unused pension funds will count towards your estate for inheritance tax (see below).

The main drawbacks:

• Investment risk. Your pot can fall in value, particularly if markets drop just as you start withdrawing.
• The risk of running out. Withdraw too much, or live longer than expected, and your money may not last.
• Ongoing decisions. You or an adviser need to manage investments and withdrawal levels for potentially decades.

If you go into drawdown without a financial adviser, providers must offer you a choice of ready-made "investment pathways" linked to how you plan to use the money. These can be a helpful starting point, but you are not obliged to use them.

Option 3: Taking lump sums

You can also leave your pot where it is and take cash in chunks, known as an uncrystallised funds pension lump sum (UFPLS). Typically, 25% of each withdrawal is tax-free and 75% is taxable. Not every provider offers this option.

It is possible to cash in your entire pot at once, but doing so can push a large part of it into a higher tax band in a single year. For many people that means handing over far more to HMRC than they would by spreading withdrawals.

Two tax traps to watch for

The Money Purchase Annual Allowance (MPAA). Once you take taxable money flexibly from a defined contribution pension, through drawdown income or a UFPLS, the amount you can pay into money purchase pensions with tax relief is reduced. The MPAA is currently £10,000 a year. Taking only your tax-free cash, or buying a standard lifetime annuity, does not normally trigger it. This matters if you are still working and contributing, including through a workplace pension. Check gov.uk for the current limit.

Emergency tax on your first withdrawal. When you first take a taxable lump sum, your provider may apply an emergency tax code, meaning you are overtaxed. You can reclaim the excess from HMRC, either during the tax year using the appropriate form or automatically at the end of the year. Details are on gov.uk.

Pensions and inheritance

Unused pension funds have historically been treated generously on death, which is one reason drawdown has appealed to those wanting to pass money on. That is changing. Under the Finance Act 2026, from 6 April 2027 most unused pension funds and lump sum death benefits will be included in your estate for inheritance tax.

Some benefits are excluded, including death-in-service lump sums paid by an employer's scheme and dependants' scheme pensions. The deceased's personal representatives, rather than the pension scheme, will be responsible for reporting and paying any inheritance tax due.

If you die aged 75 or over, your beneficiaries will also usually pay income tax on what they withdraw from an inherited pension, so the same money could face both inheritance tax and income tax. If leaving money to family is part of your thinking, check the latest rules on gov.uk and consider professional advice.

You do not have to choose just one

These options are not mutually exclusive. Many people combine them, for example:

• using part of their pot to buy an annuity that, alongside the State Pension, covers essential bills, and
• keeping the rest in drawdown for flexible spending, gifts or emergencies.

You can also phase decisions, moving portions of your pot into drawdown or annuities over several years. Some people buy an annuity later in retirement, when rates for older buyers are typically higher.

Get free guidance before you decide

If you are aged 50 or over and have a defined contribution pension, you are entitled to a free, impartial Pension Wise appointment, run by MoneyHelper. It will not recommend specific products, but it will walk you through your options. You can book via moneyhelper.org.uk.

For a personal recommendation, you will need a regulated financial adviser. You can check an adviser is authorised on the FCA register at fca.org.uk. For larger or more complex pensions, the cost of advice can be well worth it.

Finally, stay alert to scams. Be wary of unsolicited calls, offers of "free pension reviews", promises of unusually high returns or pressure to act quickly. Legitimate firms will never rush you.

This article reflects the rules as at 17 October 2026. It is for general information only and is not personal financial advice. Pension and tax rules can change, so check gov.uk for current figures before making decisions.