Don't Lock Yourself Into a Pension Annuity: Drawdown Gives You £164,000 More Over 20 Years

A level annuity paying £7,584 today will still pay £7,584 in 2046. But £7,584 in 2046 will buy you what £4,300 buys today if inflation averages 2.8% — roughly where UK CPI has been tracking.

That's not a hypothetical. It's arithmetic. A 65-year-old buying a level annuity today is accepting that their real income will halve before they're 90. The last three years of inflation — peaking at 11.1% in October 2022 — should have killed the level annuity forever, but here we are.

You can buy an inflation-linked annuity instead. But Scottish Widows quotes an RPI-escalating annuity at just 5.77% starting income for the same £100,000 pot — that's £5,770 in year one, only catching up to the level annuity rate after roughly a decade. And you've still surrendered your capital permanently.

The Bank of England's base rate at 3.75% tells you where the MPC thinks inflation is heading — down. But annuity providers price in today's gilt yields, not tomorrow's lower inflation. You're buying a product priced for a high-inflation world that the Bank of England is actively trying to end. For more on how rates affect your savings options, see our savings hub.

Here's the calculation annuity advocates skip.

Take £100,000 in drawdown, invested in a global tracker at 0.12% OCF on a platform charging 0.25% annually. Total cost: 0.37%. The FTSE 100 returned approximately 6.4% annualised over 20 years including dividends. A global tracker has done better — more like 8-9% annualised over the same period.

Assume a conservative 6% net return after fees. Withdraw £4,500 a year (4.5%, slightly above the safe rate, justified by the growth buffer). After 20 years, your pot is worth approximately £164,000. You've taken £90,000 in income AND your capital has grown.

The annuity? You've received £151,680 in total income (£7,584 × 20). Your pot is worth exactly £0. Your estate gets nothing.

With drawdown, you've received £90,000 in income plus you hold £164,000. Total value: £254,000. The annuity delivered £151,680. That's a £102,000 gap — and it only widens the longer you live if your investments keep compounding. The maths gets even better if you're invested globally rather than just in the FTSE 100. A diversified portfolio of global equities has delivered roughly 8% annualised over the past two decades.

The drawdown approach also gives you the flexibility to adjust. Good year? Take a holiday. Bad year? Tighten the belt and draw less. The annuity gives you £7,584 whether you need it or not — and HMRC taxes every penny above your personal allowance at 20% or more. For anyone interested in platform fees for drawdown, see our investing hub.

This is the argument annuity supporters dance around. When you die, your annuity dies with you. Your spouse, your children, your grandchildren — they inherit nothing from the money you handed to an insurance company.

A single-life level annuity on a £200,000 pot means roughly £15,168 a year in income. If you die after five years, the insurer keeps £124,160. Your family gets zero. The insurance company built its business model on actuarial tables — they know, on average, exactly how long you'll live. They're not offering 7.58% out of generosity.

Drawdown passes your remaining pension pot to your beneficiaries. If you die before 75, they receive it completely tax-free. After 75, they pay income tax on withdrawals — but they still get the money. Under current pension tax rules, this makes drawdown a powerful inheritance planning tool.

The planned IHT changes from April 2027 will bring pension pots into the inheritance tax net — but you're just converting a large asset into a small income stream to avoid a tax that only applies above the £325,000 nil-rate band. If your total estate (including property) already exceeds £325,000, the pension was getting taxed either way. At least with drawdown, your family gets the remaining pot.

Joint-life annuities exist, but they pay even less. Scottish Widows quotes a 100% joint-life annuity at 7.00% — that's £584 less per year than the single-life rate, and your children still get nothing when both of you die. For a broader view of pension planning strategies, see our pensions hub.

The pro-annuity crowd's strongest card is sequence-of-returns risk: if markets crash early in retirement, your drawdown pot takes a permanent hit. It's a real risk. But it's a manageable one.

Hold 2-3 years of income in cash or short-dated gilts within your SIPP. When markets fall, draw from cash instead of selling equities at the bottom. When markets recover, replenish the cash buffer. This simple 'bucket strategy' has been shown to reduce sequence risk to near zero over 30-year periods. With the Bank of England base rate at 3.75%, your cash buffer earns reasonable interest while it waits. UK gilt yields at 4.43% mean your short-dated gilt allocation generates meaningful income too.

Annuity regret, by contrast, has no solution. You cannot undo an annuity. If rates rise further, if your health deteriorates (which would have qualified you for an enhanced rate), if your circumstances change and you need capital — you're locked in. The FCA's retirement market data doesn't track annuity regret, but every financial adviser has stories of clients who locked in too early, at lower rates, and spent decades watching better deals pass them by.

Drawdown is reversible at any point. You can buy an annuity at 70, 75, or 80 if your circumstances change. But once you've annuitised, there's no going back. Flexibility has option value — and in an uncertain world with geopolitical shocks driving oil prices and inflation fears, that option value is worth preserving.

For our guide to how drawdown works in practice, see our pension drawdown explainer.

FCA data shows 349,992 drawdown policies versus 88,430 annuities in 2024/25. Four out of five retirees choose drawdown. This isn't because they've been duped by marketing — it's because drawdown is objectively better for anyone with a time horizon beyond 10 years and a pot worth planning around.

The exception proves the rule. Annuities make sense for a narrow group: people over 75 with small pots (under £50,000), no desire to leave an inheritance, and no other income sources. For everyone else, the combination of flexibility, growth potential, and inheritance makes drawdown the rational choice.

Even the annuity industry's own record year tells this story — average purchase values hit £84,000, per the ABI's 2025 data, meaning the typical annuity buyer is converting a relatively modest pot. The wealthy keep their money in drawdown. Annuities over £500,000 surged 54% — sounds impressive until you realise that's still a tiny fraction of the market. The people with the biggest pots, the best advice, and the longest time horizons overwhelmingly choose drawdown.

There's a reason for that. And it has nothing to do with being duped by platform marketing. It's because the maths works. For more on building a retirement income strategy, see our tax planning guide.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.