How does Rest Less make money
We make money through advertising and commission from affiliate links, which enable us to offer Rest Less as a free service to our users. The content on this page may use affiliate links, which track traffic from our website to a third party provider and enable us to receive a commission or payment from any traffic we refer.
* Affiliate links on this page have an * next to them. We place enormous importance on our editorial independence and the integrity of our content which means that we will never change how we write about something as a result of an affiliate link.
Working out whether to use your pension savings to buy an annuity or to draw an income from it as and when you need it is rarely an easy decision.
Whilst the thought of having a guaranteed amount of money coming in each year from an annuity is appealing for most of us, often so is the thought of your pension savings continuing to grow and having the flexibility to take money out when you want.
The good news is that it doesn’t necessarily have to be an either/ or decision and, depending on your current circumstances, you may find that a mix and match approach could be right for you.
Here, we look at some of the pros and cons of both annuities and drawdown to help you decide which option might be best for you.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
How do annuities work?
Annuities have previously been shunned by many people because you effectively ‘lose’ your pension fund when you buy one, or in other words, you hand over your savings to the annuity provider in return for the income you get every month.
However, they are currently the only product available that pays you a guaranteed income in retirement, no matter how long you live. Learn more in our article Will you get your money back from an annuity?
If you die after you’ve bought an annuity, however, your dependents won’t usually receive any of the money. The only exception to this is if you buy a product called a ‘guaranteed annuity’, which guarantees to pay an income for a specified term, for example five or 10 years. If you die during that term, your spouse or partner can receive that income, or it can be paid into your estate.
There are lots of different types of annuity, and the choices can be confusing. For example, enhanced annuities, sometimes known as impaired life annuities, are products that pay a higher income to people who have a medical condition, such as high blood pressure or heart disease, or who smoke. This type of annuity typically pays a higher income every year, as your provider is likely to have to pay out for a shorter period..
It’s also worth knowing the difference between level annuities, which mean that your income won’t rise with inflation and their spending power will dramatically decrease over the term of their retirement, and inflation-linked annuities, which provide an income that increases in line with living costs.
Whichever type of annuity you’re considering, it’s essential that you don’t rush into your purchase, and that you shop around for the best possible deal rather than just opting for the annuity offered by your pension provider, or you could end up missing out on a higher retirement income. Learn more about this in our article Why it pays to shop around for your annuity. You can find further information about how annuities work in our guide Annuities explained.
What is drawdown?
Drawdown – often known as flexible drawdown or flexi-access drawdown – is, as the name suggests, a way of drawing an income from your pension as and when you need it.
The remainder of your pension stays invested, either with your current pension provider or another provider, with the aim that you’ll benefit from any potential growth in the value of your investments over time. Of course, the investments your pension savings are in could fall as well as rise in value, so if you’re considering drawdown, you must be comfortable accepting the risks involved. Learn more in our guide What’s your attitude to risk?
Bear in mind too that the more income you take from your pension, the less will be left to grow for the future (that might sound obvious, but it’s important to think long term with your pension fund).
In short, the big advantage of using drawdown is that it gives you more freedom and flexibility, but the risk is that you run out of money because you live for longer than you expect. For example, according to Hargreaves Lansdown, someone aged 65 withdrawing 8% per year from a £200,000 pension could see their pot exhausted by the time they reach the age of 81. This assumes investment growth of 5% a year, and annual fees of 1%.
If the same person were to withdraw 4% each year, however, their pot wouldn’t run out for many decades. In fact, under those assumptions, the investment growth is high enough that the pot could continue to grow overall rather than be depleted.
Bear in mind that this is a simplified illustration and isn’t a prediction of how long any individual’s pension will last. You can find out more about drawdown in our article How pension drawdown works.
Which is most popular, annuities or drawdown?
The number of people choosing to buy an annuity, or guaranteed income for life, with some or all of their pension savings jumped to 88,430 in 2024/25, up from 82,061 in 2023/24, according to the Financial Conduct Authority’s latest Retirement Income Data, with many seeking the security of regular payments in these uncertain times.
When interest rates are higher, annuities tend to become more popular, as annuity rates tend to rise when interest rates go up. According to Hargreaves Lansdown, a 65-year-old with a £100,000 pension can currently get up to £8,041 per year from a single life level annuity. This compares to £5,881 a year for one that increases 3% every year.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: “Annuities have enjoyed a real burst of popularity in recent years off the back of soaring incomes. The vast majority of purchases made are of level products that don’t increase over time. It’s understandable why people might be tempted to go down the level route.
“However, with retirement potentially lasting twenty years or more the issue of inflation does need to be taken into account. We don’t need to see the blockbusting levels of inflation of recent years for it to have an impact. Even relatively low inflation over time will nibble away at your purchasing power and could mean your budget gets increasingly stretched over time. This means that even though inflation-linked annuities offer a lower income at outset, the fact that incomes increase every year can offer valuable reassurance, alongside your state pension, which also increases in line with the triple lock.”
Despite annuities seeing a jump in popularity, sales of drawdown have also increased, rising from 278,977 in 2023/24 to 349,992 in the 2024/25 tax year. This means drawdown is still the preferred option for the vast majority of those accessing their pension savings.
Rachel Vahey, head of public policy at AJ Bell, said: “The number of people choosing drawdown increased by a staggering 26% last year, perhaps reflecting that more wanted to bank their tax-free cash under the current rules before any possible tax regime changes were introduced.
This is borne out by 60% of people entering drawdown choosing to take their cash but no drawdown withdrawals, suggesting most had no immediate need for an income. Equally, many could also be looking for the flexibility to take the right amount of money to suit their needs, finding drawdown the perfect balance between access and investment.”
Taking a mix and match approach
There’s no rule to say that you can’t have both an annuity and use drawdown if you want to, so you may decide that you’d like to go for a mix and match approach. Say, for example, that you needed £14,000 a year to cover the basics in retirement, you could put your State Pension towards this and buy an annuity to cover any shortfall. You could then leave anything you have left over in your pension fund to dip in and out of as you need it using drawdown.
You can learn more about the choices available to you in our guide What are your pension options at retirement?
Where to go for help
What’s best for you financially may not be right for someone else. So don’t feel you have to do certain things just because someone you know has.
First of all, you don’t have to do anything just because you’ve retired. In reality, it’s likely you’ll need the money, but if you don’t, you can leave it where it is. It will continue to grow tax free. It is worth checking what it’s invested in, though, to make sure you’re not taking on too much risk.
It’s worth talking through your options with the government’s free service, Pension Wise, run by the Pensions Advisory Service and Citizens Advice, which provides people aged 50 and above with free guidance on their pension choices at retirement. You can give them a call on 0800 138 3944 to book a free appointment, or you can book one via their website.
You can’t get financial advice from Pension Wise (because they’re not regulated as financial advisors), but you can get some pointers about what you need to think about and, best of all, it’s free.
If you want personal recommendations, you’ll need to talk to a financial advisor. Financial advice isn’t generally cheap but it really can be money well spent. Learn more about this in our guide How financial advice could boost the value of your pension by £50k.
Bear in mind that you may be able to take £500 from your retirement savings tax-free to help pay for advice. You can find out more about this in our article What is the Pensions Advice Allowance? Don’t go with an advisor you don’t feel comfortable with and don’t go with anyone who doesn’t answer your questions in a way that you can understand.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
Join the discussion
Read our full commenting terms and guidelines