You can draw out as much or as little as you like (provided the money is there), and these withdrawals are taxed as income. Once you’ve bought an annuity, you can’t change your mind or trade it inĭrawdown is a way to take an income from a pension pot that stays invested in the stock market.An annuity can’t be inherited on your death (though you can choose one that continues to pay a reduced income to your spouse).Your income is inflexible (though you can choose an annuity that increases over time).Your income is limited by the annuity rates on offer (which may not be generous).It is unaffected by changes in the stock market or economy.It maintains the same level of income (or increases).What are the pros and cons of an annuity? Furthermore, if you have health problems you may be offered a more generous annuity (called an enhanced annuity).Īnnuity income is taxed in the same way as ordinary income. You can also buy joint life annuities that cover both you and your spouse. Some pay a fixed income, while others pay an income that increases over time (this can help fight inflation). Various different types of annuities are available. This means that if you live a long time, you may get back more than you paid for it. The annuity income is not limited by a pot of money, so will continue paying out until you die.
It is a contract with the annuity provider (who will be an insurance company) to provide you with this income, in exchange for a lump sum at the start – which usually comes from your pension pot. What is an annuity?Īn annuity is a product that pays you a guaranteed income for life. So, let's analyse the key difference between a drawdown and an annuity below. This side-by-side comparison of annuities and drawdown will familiarise you with the pros and cons of each, helping you to make the right choices when you access your pension. When accessing your pension, should you opt for drawdown or an annuity? It’s the retirement dilemma of our age: do you play it safe with a steady income for life, or go for flexibility and take a higher risk in the hope of receiving more?