Drawdown vs annuity, the trade-off
From age 55 (57 from April 2028) you can access a defined contribution pension. The first 25% is normally tax-free, up to £268,275 (the Lump Sum Allowance). The rest is taxed as income on withdrawal. The two main routes: flexi-access drawdown leaves your pot invested and lets you withdraw what you want; an annuity is a contract with an insurer that pays a guaranteed income for life or a fixed term. Many retirees blend the two. Always shop the open market for annuity quotes, the FCA mandates this disclosure, but most savers still take their pension provider’s in-house offer.
A 65-year-old with a £400,000 pot can buy a level single-life annuity yielding roughly 7% in 2024, that is £28,000 a year for life, no inflation linking. The same £400,000 in drawdown at a 4% ‘safe withdrawal’ rate gives £16,000 a year initially, with the pot potentially growing and any unused balance passable to heirs (often outside IHT). Annuities win for income certainty; drawdown wins for flexibility and legacy.
Taking the full 25% tax-free lump sum ‘because you can’ and putting it in a low-interest savings account. You strip the tax-sheltered wrapper for a marginal yield. Only take the lump sum if you have a defined use for it.
A 60-second lesson on this, with a worked drill, lives inside the Finlo app. Free, forever, on the basics.