What an annuity actually buys you
An annuity is an insurance product. You hand over some or all of your pension pot, usually as a single lump sum, and in exchange the provider pays you a guaranteed income for the rest of your life (or for a fixed term, if you choose that instead). The rate you're offered depends mainly on your age, health, postcode and the type of annuity you pick.
Annuity rates are closely tied to gilt yields, which is why they rose sharply from 2022 onwards after years of being unattractive. A 65-year-old in reasonable health could get a noticeably better rate today than someone retiring in 2020, simply because underlying interest rates are higher. That's worth remembering if you were put off annuities years ago and haven't looked again since.
You can add features that reduce the starting income but protect against specific risks: inflation-linking so payments rise each year, a guarantee period so payments continue to a beneficiary if you die early, or a joint-life option that keeps paying a spouse or partner after you go. Each add-on costs something in terms of the initial rate offered.
What drawdown means in practice
Flexi-access drawdown keeps your pension pot invested and lets you take income as and when you need it, within HMRC rules on tax. There's no guarantee attached — if markets fall, your pot falls too, and if you draw too much too soon you risk running out of money later in retirement.
The appeal is flexibility. You can vary how much you take each year, leave money invested for potential growth, and pass on any remaining pot to beneficiaries more easily than with most annuities. The trade-off is that you're taking on investment risk and longevity risk yourself, rather than passing it to an insurer.
A common approach is a blended one: use part of the pot to buy an annuity that covers essential living costs (rent or mortgage, utilities, food), and leave the rest invested in drawdown for discretionary spending and flexibility. This way, a market downturn doesn't threaten your ability to pay the bills.
A rough way to estimate annuity income
Providers quote annuity rates as a percentage of the pot you use to buy the annuity. As a very rough illustration, a 65-year-old buying a single-life, level (non-inflation-linked) annuity might be quoted somewhere in the region of 6-7% of the pot as annual income, though this varies by provider, health and market conditions at the time. Someone the same age wanting inflation-linking or a joint-life option would typically see a noticeably lower starting percentage.
So on a £100,000 pot, a level single-life annuity might pay in the region of £6,000-£7,000 a year before tax, while an inflation-linked joint-life version could start meaningfully lower. These are illustrative ranges only — always get personalised quotes from a broker or the open market before deciding, because rates vary significantly between providers.
For drawdown, a widely used (though not guaranteed) rule of thumb is that withdrawing around 3.5-4% of the pot per year, adjusted for inflation, has historically had a reasonable chance of lasting 25-30 years — though this depends heavily on investment returns and isn't a promise. On the same £100,000 pot, that's roughly £3,500-£4,000 in the first year, with the actual amount fluctuating with the fund's value.
Tax and your state pension forecast fit into this too
Whatever you choose, pension income (other than the 25% tax-free lump sum, up to current limits) is taxed as income in the year you take it. Combining a large drawdown withdrawal with other income in the same tax year can push you into a higher tax band, so timing withdrawals carefully across tax years can make a real difference to what you keep.
It's also worth checking your state pension forecast before finalising any retirement income plan, since the state pension will form a guaranteed baseline income alongside whatever you decide to do with a private pension pot. Knowing that figure helps you work out how much of your own pot needs to cover the gap.
Getting professional, regulated financial advice is strongly recommended before converting a meaningful pension pot into income — this is a decision that's often irreversible once made, particularly with annuities.
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FAQ
Frequently asked questions
Short answers first. Open the question if you want the detail behind the result.
Can I combine an annuity and drawdown?
Yes. Many people split their pot, using part to buy an annuity for guaranteed essential income and leaving the rest in drawdown for flexibility. You don't have to choose one or the other for your whole pot.
Is the 25% tax-free lump sum still available in 2026/27?
Most people can still take up to 25% of their pension pot tax-free, subject to the lump sum allowance rules introduced from April 2024. Check current HMRC guidance or speak to an adviser, as allowances and rules can change.
Do annuity rates change often?
Yes, they move with gilt yields and can change week to week. Getting quotes close to when you actually plan to buy is more useful than looking months in advance.
Sources
External links open the official source used to review this guide.