Why annuities are worth a second look
For much of the 2010s, annuities fell out of favour. Interest rates were at historic lows, and the income they offered seemed poor value compared with keeping a pension invested. That picture has changed considerably since the Bank of England began raising interest rates in late 2021.
As at March 2026, the average annuity rate from a major UK provider stands at around 7%, meaning a £100,000 pension pot could buy a guaranteed income of roughly £7,000 a year for life for a healthy 65-year-old. That is close to double the income the same pot would have bought in 2021. For some people, particularly those who value certainty over flexibility, this makes an annuity worth genuinely reconsidering — even if it was dismissed a few years ago.
Drawdown or annuity? It isn't either-or
The two main routes into retirement income work very differently, and the right answer depends entirely on your circumstances.
| Annuity | Drawdown | |
|---|---|---|
| Income | Guaranteed for life | Variable, not guaranteed |
| Flexibility | Fixed once purchased | Can be adjusted at any time |
| Investment risk | None — risk sits with provider | Remains invested; can fall in value |
| Reversibility | Cannot be undone once bought | Can switch to an annuity later |
| What's left to family | Often nothing, unless joint life chosen | Remaining pot can be passed on |
Many retirees don't choose one or the other exclusively. A common approach is to use part of a pension pot to buy an annuity covering essential living costs, while keeping the remainder in drawdown for flexibility, discretionary spending, and growth potential. Getting this balance right is one of the most valuable things independent advice can offer at this stage.
The risk most people don't see coming: pound cost ravaging
Pound cost ravaging describes what happens to a pension pot when regular withdrawals are taken during a falling market. Because each unit you hold is worth less when markets fall, more units have to be sold to generate the same income — permanently reducing the pot's ability to recover, even if markets later improve.
A few years of poor returns early in retirement can do damage that decades of strong average returns afterwards may never fully repair.
This is why a fixed, "set and forget" withdrawal strategy can be dangerous. Morningstar research modelled specifically on UK retirees puts the highest safe starting withdrawal rate at around 4.1% a year for someone who wants a fixed, inflation-adjusted income over a 30-year retirement — but the same research found that retirees who can flex their income down after weak markets, and back up after strong ones, could sustain materially more (Source: Morningstar, The State of Retirement Income UK, 2026). That figure applies to withdrawals from an investment portfolio only; it excludes the State Pension, any defined benefit income, tax and fees. In practice, the right strategy usually involves holding some cash in reserve, being willing to adjust withdrawals after a poor year, and reviewing regularly rather than setting it once and leaving it unchanged.
How we help at this stage
- Compare the whole annuity market — rates vary meaningfully between providers, and a small percentage difference compounds significantly over a 20 or 30-year retirement.
- Model your drawdown strategy — testing how your plan would hold up against historical market downturns, not just an average-return scenario.
- Help you decide on a blended approach — working out how much, if any, of your pot should go towards a guaranteed income versus flexible drawdown.
- Review tax implications — how your State Pension, drawdown income, and any other income interact, since this affects how much tax you actually pay.
- Revisit the plan over time — retirement income decisions are not always one-off; ongoing advice helps you adjust as markets and your circumstances change.
A pension is a long term investment the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.