Pensions and Retirement
Drawdown vs Annuity: 7.96% at 65, and the 2027 Catch
The drawdown vs annuity decision has changed twice in three years, and most of the advice online is still answering the 2021 version of the question. Two things moved. Annuity rates climbed off the floor and have stayed high: on 10 August 2026, the best level single-life annuity for a healthy 65-year-old with £100,000 paid £7,956 a year, a rate of 7.96%. And from 6 April 2027, unused pension funds come inside the estate for inheritance tax, which quietly removes one of drawdown’s biggest advantages.
Neither of those makes one option correct. They change the arithmetic, and the arithmetic is what this decision should turn on.
What you are actually choosing between
An annuity is an insurance contract. You hand over some or all of your pot and the insurer pays you an income for life, whatever happens to markets and however long you live. Once bought, it is essentially irreversible.
Drawdown leaves the pot invested and you take money out of it. You keep control, you keep the investment upside, and you carry the risk that poor returns and withdrawals together drain it while you are still alive.
The honest framing is not “which is better”. It is: how much of your essential spending do you want guaranteed, and how much are you willing to leave exposed?
Where the rates are now
Annuity rates track gilt yields, so they rose sharply with interest rates and have stayed high. From the Which? annuity tables as at 10 August 2026, for a £100,000 pot:
Read that chart carefully, because it contains the trade-off nobody mentions. Adding a 50% spouse’s pension costs you a few hundred pounds a year. Adding 3% annual escalation costs you almost a third of your starting income. Most people who say “annuities are poor value” are comparing a level annuity’s headline rate against inflation and forgetting that the escalating version, which actually protects them, starts far lower.
Which? notes rates for a healthy 65-year-old have been above 7% since 2022 and consistently above 7.5% since the start of 2025. That is a decade-plus high, and it is why annuity purchases are rising: FCA retirement income market data shows annuity sales up 7.8% to 88,430 in 2024/25.
Worth noting: drawdown is still winning on volume by a wide margin, with 349,992 new drawdown policies in the same year, up 25.5%. Drawdown is the default, not the considered choice, for a lot of people.
The April 2027 change that alters the maths
Until now, a big argument for drawdown has been inheritance. Leave the pot invested, die, and what remains passes to your beneficiaries outside your estate for inheritance tax purposes. An annuity, by contrast, generally dies with you.
From 6 April 2027, most unused pension funds and death benefit lump sums are brought inside the estate for inheritance tax. The change applies to deaths on or after that date, and personal representatives become responsible for the tax. Death in service benefits from registered schemes are excluded.
What this does to the comparison:
- The “drawdown is better for passing money on” argument weakens considerably for estates that will be over the inheritance tax thresholds. A pot that would have passed intact may now face 40% inheritance tax and then income tax in the beneficiary’s hands if you die after 75.
- Spending the pension earlier, and leaving other assets to be inherited, becomes worth modelling rather than assuming the reverse.
- Annuities with a guarantee period or value protection become more comparable, because those pay out on early death without the pot sitting in your estate for decades.
This is a genuine planning point, not a scare story, and it is the main reason to revisit a decision you made before 2025.
The case for an annuity
It removes the two risks you cannot manage. Longevity risk, living longer than the money, and sequence risk, a bad run of markets in the first few years of withdrawals. No withdrawal strategy eliminates either. An annuity does.
You are being paid a mortality cross-subsidy. Part of the reason a 70-year-old gets 8.8% while a 65-year-old gets 7.96% is that the insurer pools the risk. No investment portfolio can replicate that, and it is why comparing an annuity rate to a “safe withdrawal rate” of 3.5% or 4% is not comparing like with like.
Health improves the deal. Enhanced or impaired-life annuities pay more if you smoke, are overweight, or have a condition such as diabetes or high blood pressure. Typical uplifts run from around 10% to 30%, more for serious conditions. This is the single most commonly missed step, because it requires shopping the open market rather than taking your provider’s default quote.
It makes budgeting possible. A guaranteed income you can add to the state pension turns retirement spending into arithmetic instead of a forecast.
The case for drawdown
Flexibility while your spending is uneven. Early retirement spending is usually higher, then falls, then rises again with care costs. Drawdown can follow that shape; a level annuity cannot.
You keep the growth. Over a 30-year retirement, a pot invested sensibly may well beat what an insurer will guarantee, and you keep the difference.
You can change your mind. Drawdown to an annuity is a decision you can make at any point. Annuity to drawdown is not. That asymmetry is a real argument for starting in drawdown at 60 and annuitising later, when rates for your age are higher and your health picture is clearer.
Tax control. You choose how much comes out each year, which lets you manage your marginal rate, keep below thresholds, and use your ISA alongside. See pension tax relief explained for how the bands interact on the way in.
The answer most people should reach: both
The framing that produces good decisions is not either/or. It is floor and upside.
- Add up your genuinely essential annual spending: housing, food, energy, council tax, insurance, transport.
- Subtract your state pension. Check your state pension forecast rather than guessing, because a gap in your National Insurance record changes this materially.
- Whatever is left is your income floor. Buy an annuity large enough to cover it, and consider making it joint life if someone depends on you.
- Leave the rest in drawdown for holidays, help to family, replacement cars and the things that are optional.
That combination gives you a guaranteed floor you cannot outlive plus a flexible pot you can adapt, and it removes the pressure to time the market with money you cannot afford to lose. Our pension drawdown calculator will show you how long the remaining pot lasts at different withdrawal rates, and how much do I need to retire sets out the current benchmark spending figures.
Practical points people get wrong
You do not have to do it all at once. You can annuitise in tranches, at 65, 70 and 75. Rates rise with age, and staggering means you are not betting everything on one day’s gilt yields.
Never accept your provider’s quote without shopping. The open market difference between the best and worst rate on the same pot is large, and it is permanent.
Taking tax-free cash does not trigger the money purchase annual allowance. Drawing taxable income from drawdown does, cutting what you can contribute to £10,000 a year. If you are still working, this matters.
Normal minimum pension age rises from 55 to 57 on 6 April 2028. If your plan assumed access at 55 in the early 2030s, check it.
Nothing here is advice. These are the mechanics. A one-off session with a regulated adviser before an irreversible annuity purchase is money well spent, and Pension Wise offers free guidance from 50.
Frequently asked questions
Is drawdown or an annuity better in 2026? Neither is universally better. Annuity rates are near decade highs, at 7.96% for the best level single-life deal at 65 in August 2026, which makes annuities far more competitive than they were five years ago. Drawdown still wins on flexibility and growth. For most people, covering essential spending with an annuity and leaving the rest in drawdown beats choosing one.
Can I switch from drawdown to an annuity later? Yes, and this is the usual sequence. You can buy an annuity with all or part of a drawdown pot at any age, and rates improve as you get older. The reverse is not possible: an annuity, once bought, cannot be unwound.
What happens to my pension when I die? With drawdown, the remaining pot passes to your nominated beneficiaries, tax-free on death before 75 and taxed as their income after 75. From 6 April 2027 it will also usually count towards your estate for inheritance tax. A standard annuity stops at death unless you bought a guarantee period, value protection, or a joint-life option.
How much of my pot should I annuitise? Work out your essential annual spending, subtract your state pension, and annuitise enough to cover the shortfall. That figure is personal, but the method is the same for everyone and stops the decision being a guess about markets.
Do I get more if I am in poor health? Yes, and it is the most valuable step in the whole process. Enhanced annuities pay typically 10% to 30% more for conditions like diabetes, high blood pressure or a smoking history, and considerably more for serious illness. You have to apply on the open market and disclose properly to get it.
Should I buy an annuity now or wait for better rates? Rates follow gilt yields, and nobody reliably predicts those. Waiting also has a cost: every year you delay is a year of income not received. Staggering purchases across several years is the practical answer to not knowing, and it also captures the higher rates that come with age.
