Annuity vs Drawdown in 2026: How Sequence of Returns Risk Quietly Drains Your Pension

Hi Angela. We are unpacking "Annuity vs Drawdown in 2026: How Sequence of Returns Risk Quietly Drains Your Pension" today and tying it back to the wider Cost Saver ecosystem, including tools like Annuity vs Drawdown Simulator UK · Failure Rate, so you can turn insights into action quickly.

Exactly. Treat this chat as a smart estimate only, not as professional financial guidance. Always check important details with official sources or a qualified expert before making any big decisions.

Good to be here. And yeah, this one is — I mean, it's a big topic. Probably one of the most consequential financial decisions most people will ever make, and honestly, I think it gets way less attention than it deserves.

I had, yeah, but — I think it's one of those things where even if you've heard the term, you don't always appreciate how much damage it can actually do in practice. Which is kind of what we want to dig into today.

Yeah, absolutely. So an annuity is basically where you hand over a chunk of your pension pot to an insurance company, and in return they pay you a guaranteed income for the rest of your life. However long you live. Markets go up, markets crash — your payment doesn't change.

Drawdown is the other approach, where you keep your money invested and just take withdrawals from it as you need them. So you stay in the market, you keep control, you can change how much you take. But the flip side is — there's no guarantee. If the pot runs out, it runs out.

Yeah, and that makes sense when you understand the context. Annuity rates were pretty poor for a long time. Back in 2020, 2021, a healthy 65-year-old might be looking at rates below 4.5%. So you'd hand over, say, £100,000 and get back maybe £4,500 a year. People looked at that and thought — I can do better keeping it invested.

Often, yes — especially through that long bull market after 2009. Lots of people saw their pots grow quite nicely. But the risk was always there, sort of quietly building in the background. And now the picture's shifted quite a bit.

So annuity rates have come back up significantly. Higher interest rates, shifts in gilt yields since 2022 — and now in 2026, a standard single-life, level-payment annuity for a healthy 65-year-old typically pays somewhere between 6.5% and 7.2% of the amount you use to buy it.

So £100,000 might buy you a guaranteed income of around £6,500 to £7,200 a year. For life. Back in 2021, the same £100,000 might have bought closer to £4,500. That's a difference of over £2,000 a year.

That's more than £40,000 across a 20-year retirement. Which is — yeah. It's not nothing, is it.

Yeah, this is — this is the crux of it, really. So the idea is — and it sounds a bit counterintuitive at first — the order in which your investment returns happen matters enormously once you're taking money out. Not just the average return over time. The order.

Right, so — when you're saving, a market fall is uncomfortable, but you keep buying at lower prices. You're kind of benefiting in a weird way. But when you're withdrawing, a market fall means you have to sell more units just to raise the same income. And those units are gone. They can't recover.

—exactly. And the blog has a worked example that I think really illustrates it. So imagine two retirees — both have a £200,000 pot, both withdraw £10,000 at the start of every year. Over three years, they both experience exactly the same three returns: a fall of 20%, a fall of 5%, and a rise of 10%. Same returns. The only difference is the order they happen in.

So Retiree A gets the bad news first. After the first withdrawal, the pot is £190,000, and then a 20% fall takes it down to £152,000. Then the second withdrawal, the 5% fall — it's about £134,900. Then the third withdrawal and the 10% rise — the pot ends at roughly £137,400.

Retiree B gets the rise first, then the small fall, then the big fall. Their pot ends at roughly £143,200. That's a gap of about £5,800 after just three years. Same returns, same withdrawals, completely different outcome.

Just because of the order. And — and this is the bit that makes it really nasty — the gap doesn't stay still. Retiree A has a smaller pot going forward, so they benefit less from any recovery. A decade later, that early stumble can be the difference between a comfortable income and having to make some pretty uncomfortable cuts.

That's exactly the trap. A pension calculator showing a smooth 5% a year assumes every year is the same. Real markets never behave like that. Does that make sense?

[laughs] Yeah, it's a bit brutal as a phrase, but it's accurate. It's the opposite of pound-cost averaging, which is what helps you when you're saving. When you're spending down, the same mechanism works against you.

Yeah, inflation adds a second squeeze. If prices are rising while your investments are falling, you need more pounds each year just to maintain your lifestyle. So your withdrawals are getting bigger at precisely the worst moment. Which is — it's a grim combination.

Right, and I think it's important to be genuinely honest here rather than just cheerleading for one or the other. So annuities: the big strength is that they transfer the risk from you to the insurer. Markets crash, your payment doesn't change. And there's also just — the psychological comfort of not having to make decisions every year. For a lot of people that's genuinely valuable, you know?