Pension Annuity Calculator — Annuity or Drawdown, or Both?

In mid-2026, a healthy 65-year-old buying a level single-life annuity gets around £7,890 a year per £100,000. That's 7.9% — guaranteed, for life, however long that turns out to be. Rates are the strongest since before the 2008 crisis, because they track gilt yields, which rose sharply from 2022.

Meanwhile, the sustainable withdrawal rate from a drawdown pot — the amount you can take each year with a high probability of not running out over 30 years — is around 3.5% to 4%. Morningstar's 2025 research puts it at 3.9%. UK-specific work lands lower still, at 3.0–3.5%.

On a £300,000 pot that is £23,700 a year versus £11,700. The annuity pays more than double.

So why does drawdown still outsell annuities four to one? Because people run the wrong comparison. They put 7.9% next to an expected investment return of 5–7% and think "I can beat that". But you can't spend your return — you have to leave a large margin for the years when it's negative, for the fees, and for the possibility you live to 96. That margin is the difference between 7% and 3.9%, and it's not optional.

None of which means "buy an annuity". Drawdown wins decisively on flexibility and on leaving money to family, and those are real, legitimate priorities. But you should make that trade knowing what it costs you: roughly half your income.

Stop thinking "annuity or drawdown". That framing is a trap, and it's the reason so many people end up with the wrong answer.

Instead, split your spending into two piles. Essential — housing, food, energy, council tax, insurance, basic transport. The money you must spend, every month, regardless of what the FTSE did. Discretionary — holidays, hobbies, gifts to grandchildren, the new car, eating out. Lovely, and entirely cuttable in a bad year.

Now buy an annuity just big enough that it, plus your State Pension, covers the essential pile. Leave everything else in drawdown.

Why this changes everything

It isn't just about the money. It's about what you're able to do in a crash.

If your bills depend on your portfolio and markets fall 30%, you are forced to sell investments at the bottom to eat. That is precisely the behaviour that destroys pots — and you have no choice, because the electricity bill doesn't care about sequence risk.

If your bills are covered by guaranteed income, a 30% fall is irritating rather than existential. You cancel the holiday, you don't touch the pot, and you wait. That single fact is worth more than any amount of clever asset allocation.

The floor mode above sizes it precisely: how much to annuitise, how much stays invested, and whether your total spending target is actually reachable.

Two retirees. Same £300,000 pot. Same withdrawals. Same average annual return over 30 years — literally the same set of numbers.

One of them gets the bad years first. The other gets them last.

They do not end up in the same place. They can end up hundreds of thousands of pounds apart, and one of them may run out entirely.

Why the order matters so much

It's mechanical, not mystical. When markets fall and you take a fixed withdrawal, that withdrawal is a bigger percentage of a shrunken pot. You're selling more units, at a low price. When the market recovers, you own fewer units to recover with. The damage is permanent, and no amount of good years afterwards fully undoes it.

Get the good years first and the opposite happens: your pot grows before you erode it, and the later bad years hit a much bigger balance.

Same average. Completely different retirement. It's the single biggest determinant of whether a 4% withdrawal rate works in practice, and it is entirely down to luck about when you happened to retire.

The head-to-head mode above runs the identical return sequence in both orders so you can see the gap for yourself. It is usually startling.

The three defences

Cash buffer — hold 1–2 years of withdrawals in cash so you never have to sell into a fall. Guardrails — cut withdrawals by 10% after a bad year. An income floor — annuitise the essentials, so a crash simply cannot force your hand.

An annuity has zero sequence risk. The insurer absorbs it. That is a large part of what you're buying.

You cannot diversify longevity risk. You can only insure it — and an annuity is the only product that does. That is literally what you are paying the insurance company for: they take the risk that you live to 103.

There's a third dimension people forget too. Drawdown asks you to keep making investment and withdrawal decisions in your eighties and nineties, potentially through cognitive decline, potentially alone after a bereavement. An annuity asks nothing of you ever again. For some households that is the deciding argument, and it has nothing to do with returns.

William Bengen's 4% rule came from US stock and bond data, analysed in the 1990s. Withdraw 4% in year one, index it to inflation, and in his backtest you survived every 30-year window.

That is a genuinely useful piece of research. It is also not about you.

UK real returns have been lower than US ones. UK inflation has been more volatile. And UK fund charges are higher. Run the same work on British data and the safe rate drops: Morningstar's 2025 figure is 3.9% at 90% confidence; UK-specific research (Blanchett et al.) lands at 3.0–3.5%.

Note what "90% confidence" quietly means: even at 3.9%, one in ten retirees still runs out. That is not a rounding error. That is a real person, aged 91, out of money.

Look at that last row against the others. It's not close on income. It's only close once you value flexibility and inheritance — which many people rightly do.

Here's the thing that reframes the whole question: drawdown is reversible. An annuity isn't.

You can be in drawdown for fifteen years and then buy an annuity with what's left. You can never unwind an annuity.

Which points at an obvious strategy, and the Institute for Fiscal Studies calls it "flex and fix": drawdown through your sixties and early seventies, while you have the energy to manage it, the appetite for market risk, and the years for markets to recover from a bad patch. Then annuitise in your mid-to-late seventies — by which point annuity rates are far higher, because your life expectancy is shorter. A 75-year-old gets a substantially better rate than a 65-year-old for exactly the same pot.

You get flexibility when flexibility is useful, and certainty when certainty is what you need — at the point in life when running out of money is most terrifying and least fixable.

It is close to consensus best practice, and almost nobody is told about it, because it isn't a product anyone sells.

The MPAA — a £50,000 mistake made with one click

The moment you take any taxable income from drawdown — one pound — your annual pension contribution allowance drops permanently from £60,000 to £10,000 for the 2026/27 tax year. It's called the Money Purchase Annual Allowance and it cannot be undone.

If you're still working, or might go back, that is potentially catastrophic. Taking only your 25% tax-free cash does not trigger it. Taking a single pound above that does.

The State Pension eats your Personal Allowance

The full new State Pension is now around £12,548. Your Personal Allowance is £12,570.

Look at those two numbers. The State Pension alone consumes virtually the entire tax-free allowance. Which means almost every pound of your drawdown or annuity income is taxed at 20% from the very first pound — even if your total income is modest and you've never been a higher-rate taxpayer in your life.

People are routinely shocked by this. Plan for it: your £30,000 of gross retirement income is not £30,000 in your pocket.

Until now, one of the strongest arguments for drawdown has been inheritance: an unused pension pot passed to your family outside your estate, free of inheritance tax.

From April 2027, the government plans to bring most unused pension funds into the deceased's estate for IHT purposes. Pensions will still pass to beneficiaries — but IHT may apply at 40% above the nil-rate band, before the existing income-tax rules on the beneficiary even kick in.

For estates around or above the £325,000 nil-rate band, this materially weakens the "keep it in drawdown for the kids" case. Money that would have passed tax-free could now be taxed twice.

It's one reason annuity sales have been climbing — £7.4 billion in 2025, the highest since pension freedoms launched in 2015. Rates went up, and one of drawdown's biggest advantages is being taken away.

This is a live policy area, so check the current position before acting — but if inheritance is a major part of your reasoning for staying in drawdown, that reasoning is weaker than it was.

You're 65 with a £300,000 pot. Full State Pension of £12,548. Your essential spending is £22,000 a year; you'd like to spend £30,000.

Option 1 — all drawdown

At a sustainable 4%, you can take £12,000. Plus State Pension, that's £24,548 gross — short of your £30,000 target, and you're carrying every ounce of the investment and longevity risk yourself. Push the rate to 6% to hit your target and you'll likely run out in your eighties.

Option 2 — all annuity

At 7.9%, £300,000 buys £23,700 a year, guaranteed. Plus State Pension: £36,248 gross. You've comfortably beaten your target — but you have nothing left, no flexibility, and nothing for the children.

Option 3 — the income floor

Your essentials are £22,000. State Pension covers £12,548, so you need the annuity to produce £9,452. At 7.9% that takes £119,650 of your pot.

The remaining £180,350 stays in drawdown. At 4% that's another £7,214 a year, on top.

Total: £31,762 gross — you've beaten your £30,000 target. Your essentials are guaranteed for life and cannot be touched by any market. And you still have £180,350 invested, flexible, and available to your family.

And if you'd mentioned your blood pressure?

An enhanced annuity at +25% means you'd only need £95,700 to buy the same floor — leaving £24,000 more in drawdown. For declaring something on a form.

Same pot. Same day. The floor strategy beats both extremes — and it's the one nobody sells you, because it isn't a product.

Official sources & further reading: book a free Pension Wise appointment, check your forecast at GOV.UK State Pension, and read the pension tax rules. For annuity rates and options, use the annuity rates calculator.