Annuity, drawdown or both?

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By Laura Miller | Published - 19 Jan 2026

Important info

This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.

For years, people retiring faced a binary choice: buy an annuity (security but zero flexibility) or choose drawdown (flexibility but zero security).

But this is a false choice. You don’t have to pick just one. In fact, for many people, the smartest financial move is to use a “hybrid’ strategy that blends the two.

Pete Cowell, head of annuities at Standard Life, says: “With people living longer, and with more people managing larger defined contribution pension pots, we expect recognition for this combined approach to grow as people look at a range of products and approaches to meet their retirement goals.”

Here’s how the two options stack up, and how to combine them. 

What’s on this page?

Option 1: The annuity (‘Safety first’) 
Option 2: Drawdown (‘Maximum control’) 
The ‘hybrid’ strategy: the best of both worlds?
At a glance: annuity vs drawdown
4 action points for your retirement

Option 1: The annuity (‘Safety first’)  

With an annuity, you hand over a lump sum of your pension cash to an insurance company. In return, they pay you a guaranteed monthly income for the rest of your life.

Stephen Lowe, group communications director at Just Group, says: “No matter how long you live or how markets move, you are guaranteed to receive a certain level of income every single month for the rest of your life – like a salary cheque that arrives every month and never stops.”

Pros: You cannot run out of money. It is stress-free.
Cons: Once you buy it, the money is gone. You usually can’t change your mind, and you can’t dip into the pot for emergencies.The value of a level annuity may be eroded by the rising cost of living, whereas an inflation-linked annuity will be much more expensive.

Helen Morrissey, retirement expert at Hargreaves Lansdown, says: “It’s a good idea to look across the market before you decide on an annuity. Different providers offer different rates so you could find yourself thousands of pounds better off over the course of your retirement by doing your research.”

Option 2: Drawdown (‘Maximum control’)

You leave your pension invested in the stock market and withdraw cash as you need it.

Stephen Lowe explains: “Drawdown can offer more flexibility and the potential for growth, but it also carries exposure to investment risk and the danger of running out of money if withdrawals are too high or stock markets underperform.”

Pros: You control the money. If the market does well, your pot grows. You can pass unspent cash to your family when you die.
Cons: If you live too long, or the market crashes, you could run out of money in your 80s.

A couple sat next to a man signing a document — Image credit: Shutterstock

The ‘hybrid’ strategy: the best of both worlds?  

Instead of betting everything on one option, you can split your pot.

The strategy:

Calculate your essential bills (heating, food, council tax).
Use part of your pension to buy an annuity that covers exactly these costs.
Leave the rest of your pension in drawdown for luxuries (holidays, cars, gifts).

The result: You sleep easy knowing the lights will never go out, but you still have a pot of cash to enjoy or leave to your children.

Pete Cowell points out that annuity purchases could be phased over time, for example, buying an annuity every five years from age 65 to 80.

“For example, take a saver with a starting pension of £150,000 who purchases a level annuity in four phases – £90,000 at aged 65, followed by £20,000 every five years. They put the remaining balance invested in drawdown. Assuming a 5% per year investment return, and with an income of 3% a year taken from this portion of the pension... Overall they will receive a total lifetime income of £259,000.”

This approach adds an element of inflation protection and allows a retiree to benefit from gradually improving annuity rates as they get older, he says.

It also preserves some flexibility, as the portion left in drawdown remains accessible and has growth potential. However, it is subject to investment risk and market fluctuations.

How to use your pension is a big decision, and an annuity purchase can’t be undone. So it's a good idea to get advice tailored to your own financial situation, whether that’s free advice from the government's MoneyHelper Pension Wise service, or paid-for advice from a financial adviser.

Feature	Annuity	Drawdown
Income	Guaranteed for life.	Not guaranteed. You could run out.
Flexibility	None. Rate is fixed forever.	Total. Take cash when you want.
Inflation	Vulnerable (unless you buy an expensive inflation-linked one).	Potential to beat inflation via investment growth.
Death	Money usually dies with you (unless you add protection).	Unspent pot passes to your family.

4 action points for your retirement     

Check your ‘essential’ number: Don’t guess. Check your bank statements to see exactly how much money you need each month.
Shop around: Never just accept the annuity rate from your current pension provider. You can often get much higher rates on the open market, especially if you have health issues (an “enhanced annuity”).
Build a cash buffer: If you choose drawdown, Helen Morrissey recommends keeping “one to three years worth of essential expenses in an easy access saving account – so you can supplement your income during these times”.
Consider taking advice: If in any doubt, consider taking advice – either from the MoneyHelper Pension Wise service, or from a financial adviser.