Two different ways to turn a pot into an income
An annuity is an insurance product: you hand over some or all of your pot in exchange for an income that's paid for the rest of your life, however long that turns out to be. The rate you're offered depends on your age, health, and the annuity market at the time — once you buy it, the income is fixed by the terms you agreed, whether you live to 70 or 100.
Drawdown keeps the pot invested and you draw an income from it directly, as much or as little as you choose, whenever you choose. The income isn't guaranteed to last — it depends on what you withdraw, investment returns, and charges — but the money remains yours, and anything left over can normally be passed on when you die.
It's also possible to combine the two: annuitise part of a pot for guaranteed income to cover essential costs, and keep the rest in drawdown for flexibility. This calculator compares the two approaches individually rather than modelling a blend.
A worked example
Take a £300,000 pot at 65, an indicative 6.5% level annuity rate, and £15,000 a year drawn from drawdown (rising with inflation) at 5% mid growth and 0.75% charges. The level annuity pays £19,500 a year, every year, for as long as the person lives. Drawdown starts lower, at £15,000, but the amount actually withdrawn each year keeps pace with inflation.
Under these particular assumptions, the drawdown pot runs out around age 89, after which the income shown drops to whatever's left, then to zero — while the annuity keeps paying £19,500 a year regardless of how long the person lives. Change the drawdown withdrawal rate, the growth assumption or the annuity rate and this picture shifts: a lower drawdown withdrawal or stronger growth extends how long the pot lasts, and a higher or lower annuity rate changes what income it buys. Neither outcome is right or wrong — they're two different trade-offs between certainty and flexibility.
What the annuity rate actually means
The annuity rate above is illustrative — a broad approximation of what a level, single-life annuity might pay a 65-year-old, not a quote from any specific insurer. Real annuity rates vary by provider, and move with gilt yields and life expectancy assumptions, sometimes by a meaningful amount within the same year. Anyone seriously considering an annuity should get quotes from the open market, since rates between providers for the same person can differ by more than most people expect.
Enhanced or impaired-life annuities pay more to people with certain health conditions or lifestyle factors, on the basis that their life expectancy is shorter — this calculator doesn't model that, so anyone in that position may see a higher real-world quote than the illustrative rate shown here.
Level vs RPI-linked
A level annuity pays the same amount every year, so its real spending power falls as prices rise. An RPI-linked (inflation-linked) annuity starts lower but rises each year in line with inflation, aiming to hold its spending power over time. This calculator models the RPI-linked starting income as a simple, clearly illustrative fraction of the level rate, since insurers price the inflation-linking into a lower opening income rather than charging separately for it.
Whether the lower starting income of an RPI-linked annuity is made up for by later increases depends entirely on how long the annuity is in payment and how inflation actually runs over that period — something that can't be known in advance.
What each route gives up
An annuity generally has no value left to pass on when the annuitant dies, unless a guarantee period or joint-life option was built in at the outset, which typically reduces the income in exchange. Once bought, it usually can't be unwound or adjusted if circumstances change.
Drawdown carries investment risk — the pot can fall in value, particularly in the early years of taking an income, and there's no guarantee it lasts as long as the person needs it to. It also requires ongoing decisions about how much to withdraw and how the pot is invested, which an annuity removes entirely.
Common mistakes people make
Comparing a single annuity quote against a single drawdown projection, both taken as certainties, is the most common one — an annuity income genuinely is fixed once bought, but a drawdown projection is only ever one of many possible paths a real portfolio could take.
Another is treating the decision as permanent and irreversible in the same way for both routes. Drawdown can usually be adjusted, paused, or converted into an annuity later; an annuity, once purchased, typically cannot be reversed.
A third is ignoring charges on the drawdown side. The pension fees calculator shows how platform and fund charges compound over the years a pot stays invested, which matters more for drawdown, held over decades, than for a one-off annuity purchase.
Scottish taxpayers
Income from both an annuity and pension drawdown is taxed as income in the year it's received, using the Scottish income tax bands if your main residence is in Scotland rather than the rest-of-UK bands. This calculator shows income before tax; use the pension tax-free lump sum calculator to work through the tax due on a specific withdrawal, including the Scottish bands.