Annuity vs. Drawdown: Choosing a Retirement Income Strategy as a UK Expat

For UK expats, this decision is often shaped by additional considerations such as cross-border taxation, currency exposure, and long-term residency plans. UK expats may select from several approaches, with purchasing an annuity and entering drawdown among the most common.

To support informed decision-making, this annuity vs. drawdown comparison will explain the key differences between these two strategies and outline the considerations that may determine which is more appropriate for your circumstances, including risk tolerance, income flexibility, longevity expectations, and tax treatment in your country of residence.

For most UK expats, the choice between annuity and drawdown is not a one-off, permanent decision but an evolving strategy that can change as markets, health, residency, and income needs develop over time. As a result, many retirees revisit or adjust their pension income approach as their circumstances change in retirement.

How Does an Annuity Work?

An annuity is an insurance contract that can convert some or all of your pension savings into a guaranteed income stream. If you purchase a lifetime annuity, income is payable for as long as you live, regardless of whether you exhaust the original purchase amount.

For UK expats, annuities are typically purchased from UK-regulated insurers and paid in pounds sterling, even if you are resident overseas.

Depending on the annuity income dynamics, you may select between two options:

1. Level annuity: Pays a fixed amount throughout your retirement.
2. Escalating annuity: Payments increase annually, either by a fixed percentage or in line with an inflation measure such as the Retail Prices Index (RPI).

It is important to note that inflation-linked increases are usually based on UK inflation measures and may not reflect changes in the cost of living in your country of residence.

There are also different annuity types according to the number of annuitants and the point at which payments cease:

The specific annuity income amount, or the annuity rate, depends on several factors, most notably:

• Age at the time of purchase
• Pension pot size
• Your overall health
• Current interest rates

In some cases, lifestyle or medical conditions may qualify you for an enhanced annuity, which can provide a higher income than a standard annuity.

Purchasing an annuity is typically an irrevocable decision. Once the annuity is in force, you generally cannot modify it or cash it in, so it is crucial to determine whether this product meets your retirement needs before committing any funds.

What Are the Advantages and Disadvantages of Annuities?

The most prominent advantage of annuities is income security—a lifetime annuity can provide a predictable stream of income you can rely on throughout retirement.

If you prefer limited exposure to market volatility or are concerned about outliving your savings, purchasing an annuity may be a sensible decision.

Investing in an annuity provides various additional advantages, most notably:

• Limited ongoing management: Once an annuity is in payment, the insurer assumes responsibility for meeting the contractual income promise.
• Regulatory protections: If you buy an annuity from a UK-regulated insurer and it qualifies as a contract of long-term insurance, the Financial Services Compensation Scheme (FSCS) can protect 100% of the claim with no upper limit if the insurer fails. Other pension products, such as SIPPs or investment-linked arrangements, may be subject to different FSCS protection limits (typically up to £85,000 for investment shortfalls).
• Customisation options: You may tailor the annuity to your needs through features such as joint-life benefits, guarantee periods, or value protection, which can provide continuing income or lump sum payments for beneficiaries upon your passing.

However, annuities are not suitable for everyone. Their irreversibility means you generally cannot change the terms or access the underlying capital. This lack of flexibility may be problematic if your financial circumstances change or you face a significant expense.

Unless death benefit options are selected at the time of purchase, single-life annuities will typically cease upon your passing and may leave no residual value for your beneficiaries.

Expats who wish to preserve value for heirs generally need to choose features such as joint-life benefits, guarantee periods, or value protection, each of which usually reduces the initial income level.

Timing Matters: When You Commit to an Annuity

For expats approaching retirement, the timing of annuity purchase can be as important as the decision to annuitise at all.

Key considerations include:

• Interest rate sensitivity: Annuity rates fluctuate with long-term interest rates and bond yields.
• Irreversibility: Once purchased, annuity terms generally cannot be changed.
• Phased strategies: Some retirees initially use drawdown and purchase annuities later in retirement, when income needs are clearer, health circumstances have changed, or annuity rates are more favourable.

Using drawdown as a temporary or partial solution can provide flexibility while delaying irreversible decisions, particularly during the early years of retirement or periods of market uncertainty.

How Does Pension Drawdown Work?

Pension drawdown (specifically flexi-access drawdown) enables you to keep your pension pot invested while withdrawing from it as needed. You are typically permitted to take up to 25% of your pension benefits as tax-free lump sums, allowing the remainder to participate in any future investment growth.

For UK expats, pension drawdown is usually accessed through a UK-registered pension scheme, such as a SIPP or international SIPP, even while resident overseas.

You are not required to withdraw any specific amounts, nor do you need to follow a pre-defined withdrawal cadence. Drawdown allows you to determine when you need the funds and how much to take.

Regardless of flexibility, drawdown is subject to various rules, most notably:

• You can normally access UK defined-contribution pension benefits from age 55, increasing to 57 from 6 April 2028, unless you hold a protected pension age.
• You can usually take up to 25% of your pension benefits as tax-free lump sums, subject to the Lump Sum Allowance (LSA), which is currently £268,275.
• Withdrawals in excess of your available tax-free lump sum entitlement are treated as taxable income and taxed at your marginal rate in the tax year of receipt.

When you enter drawdown, you will need to decide how to invest the remaining funds. Depending on the provider, you may be able to select from available investment options or agree on an approach aligned with your risk tolerance and objectives.

Because drawdown does not provide guaranteed income in the same way an annuity can, the sustainability of withdrawals depends on investment performance and withdrawal discipline.

This makes ongoing review particularly important for expats, whose tax position, residency status, or currency exposure may change over time.

• You can normally access UK defined-contribution pension benefits from age 55, increasing to 57 from 6 April 2028, unless you hold a protected pension age.
• You can usually take up to 25% of your pension benefits as tax-free lump sums, subject to the Lump Sum Allowance (LSA), which is currently £268,275.
• Pension withdrawals in excess of the available tax-free lump sum allowance are treated as taxable income and taxed at your marginal rate in the tax year of receipt.

What Are the Benefits and Drawbacks of Drawdown?

The primary advantage of entering drawdown is the level of control it provides over your retirement income. You can adjust the timing and size of withdrawals to suit your changing circumstances and life events, which is not possible with an annuity.

Other prominent benefits include:

• Inflation hedging: Because a potentially significant portion of your pension pot remains invested, it may grow over the long term and help offset inflation risk.
• Investment flexibility: You can typically decide how the remaining pension funds are invested, rather than exchanging the pension pot for a fixed contractual income.
• Inheritance planning: Defined contribution pensions held in drawdown can usually be passed to beneficiaries. The tax treatment of death benefits depends on factors such as whether death occurs before or after age 75, as well as local tax rules in the beneficiary’s country of residence.

These advantages are offset by the risks associated with keeping your pension invested. Market volatility can significantly impact long-term pension income, making careful investment planning crucial.

Drawdown strategies are also exposed to sequence-of-returns risk, where significant withdrawals during market downturns can permanently reduce the capital available to recover, increasing the likelihood of exhausting the funds.

While these risks cannot be eliminated entirely, they can often be managed through appropriate investment strategy, withdrawal discipline, and regular review.

If planned attentively, drawdown can be an effective way to access and manage retirement income according to your circumstances and lifestyle preferences.

Currency Risk for UK Expats

UK pensions are typically denominated and paid in pounds sterling, while most expats incur living expenses in a foreign currency.

This creates an additional layer of risk that is particularly relevant when choosing between an annuity and drawdown. Key points to consider include:

• Annuities:
  • Most UK annuities pay a fixed or escalating income in GBP.
  • Even inflation-linked annuities are usually linked to UK inflation, which may not reflect cost-of-living changes in your country of residence.
• Drawdown:
  • Drawdown allows pension assets to remain invested and potentially diversified across currencies.
  • However, withdrawals remain exposed to exchange-rate movements, which can increase or reduce spending power year to year.
• Currency mismatch risk:
  • A strengthening local currency can reduce the real value of GBP-denominated pension income.
  • A weakening local currency may increase apparent income but add volatility and unpredictability.

For UK expats, managing currency exposure, rather than focusing solely on investment or longevity risk, can be a decisive factor when selecting or combining retirement income strategies.

Should You Select Pension Drawdown or an Annuity?

Neither an annuity nor a drawdown is universally superior, as each option may be more suitable for expats in specific scenarios. To make an informed selection, consider the following factors:

1. The role of the UK State Pension
2. Risk tolerance
3. Income requirements
4. Longevity expectations
5. Estate planning considerations

The Role of the UK State Pension for Expats

For many UK expats approaching retirement, the UK State Pension represents a core source of guaranteed income. How it is paid, taxed, and uprated abroad can materially affect whether an annuity is necessary or whether drawdown flexibility is sufficient.

Key considerations include:

• Payment overseas: The UK State Pension can generally be paid to expats living abroad.
• Uprating rules: Whether your State Pension increases annually depends on your country of residence.
  • Expats living in certain countries (such as the EU, EEA, Switzerland, and a limited number of others) typically receive annual increases.
  • In many other jurisdictions, the State Pension is frozen at the rate first paid.
• Tax treatment: State Pension income is taxable, with taxing rights determined by domestic law and any applicable double tax agreement.

If you expect to receive a meaningful, uprated State Pension, you may have less need to secure additional guaranteed income through an annuity. Conversely, expats with a frozen or heavily taxed State Pension may value the certainty of annuity income more highly.

Risk Tolerance

Annuities are typically favoured by risk-averse expats, including those who:

• Prioritise certainty without market and longevity risk
• Have acquired sufficient wealth and do not wish to pursue further growth
• Wish to obtain a predictable retirement income for the remainder of their life

By contrast, entering drawdown is more suitable for individuals who are comfortable with investment risk or who have additional assets that can act as a safety net during market downturns.

You may also prefer a drawdown if you possess investment experience or have professional support guiding your retirement planning. In this instance, a more proactive approach through drawdown may be preferable to purchasing an annuity.

Income Requirements

Retirees with predictable living expenses may benefit more from annuities than a drawdown. If you believe your everyday needs will remain relatively stable, and you can accurately estimate any considerable expenses, a paycheck-like income you receive from an annuity should suffice.

By contrast, if you anticipate irregular spending, the flexibility of a drawdown may better accommodate your needs. Specifically, you may benefit from a drawdown if you:

• Plan on relocating frequently
• Support family members and cannot estimate their needs
• Wish to front-load expenses (e.g., spend more initially to set up a life in another country, after which you expect to spend less)

You should also consider pension income alongside other income sources. For instance, if you receive a State Pension or ongoing rental income, you may be less reliant on an annuity to provide financial security. Where guaranteed income sources are limited, an annuity may help establish a stable income floor.

Longevity Expectations

Although it is not possible to definitively predict your health and lifespan, you should broadly consider them when deciding between an annuity and a drawdown. An annuity’s value increases the longer you live, so the lifetime payments are appealing with longer life expectancy.

However, you may wish to consider a drawdown if:

• There is a family history of premature death.
• You have been diagnosed with a serious or life-threatening illness.
• Your lifestyle may reduce your life expectancy (e.g., due to smoking or engaging in high-risk activities).

However, these same circumstances may make an annuity more attractive if an enhanced annuity is available. For example, smokers or individuals with certain medical conditions may qualify for higher annuity income, partially offsetting the likelihood of a shorter payment period.

Estate Planning Considerations for UK Expats

Inheritance planning is often a decisive factor for expats choosing between annuity and drawdown, particularly where family members live in different jurisdictions.

Key differences include:

Additional points for expats:

• Some countries apply forced heirship rules that may override UK pension beneficiary nominations.
• Local inheritance or succession taxes may apply, even where UK rules treat pension death benefits favourably.
• Annuity death benefits must usually be selected at outset and often reduce initial income.

For expats who prioritise passing wealth to beneficiaries, drawdown may be more attractive, although local succession law and tax treatment should always be reviewed.

Can You Combine Drawdown With an Annuity?

You can combine drawdown with an annuity rather than strictly selecting one product. Doing so is not only possible but often beneficial, as it may help balance income security with withdrawal flexibility.

For UK expats, this blended approach can be particularly useful where some income certainty is required to meet essential living costs, while flexibility is needed to manage variable expenses, taxation, or currency exposure.

A simplified strategy for combining drawdown with an annuity would involve:

1. Utilising part of your pension pot to purchase an annuity that provides sufficient income for essential or non-discretionary expenses.
2. Entering drawdown with the remainder of your pension to ensure it remains invested for growth and available for discretionary or irregular spending.

Expats typically prefer securing at least a base level of guaranteed income while retaining flexibility and control over the remaining pension assets.

This approach may also allow retirees to delay or phase annuity purchases, adjusting the balance over time as circumstances, health, or income needs change.

If your financial circumstances allow you to combine the two products, this should be done with appropriate professional guidance to ensure the structure remains aligned with your residency status, tax position, and long-term objectives.

Key Pension Income Considerations for UK Expats

Regardless of whether you enter drawdown or purchase an annuity, you must consider several interrelated factors if you receive UK pension income while living abroad:

1. Double tax agreements (DTAs)
2. Local tax treatment of different pension income types
3. Pension transfers

Double Tax Agreements (DTAs)

Expats who do not expect to repatriate to the UK in retirement are often concerned that their pension income may be taxed in both the UK and their country of residence.

To mitigate or eliminate double taxation, the UK has entered into double tax agreements (DTAs) with numerous jurisdictions, including the UAE and Australia.

DTA provisions can vary significantly. While many treaties allocate taxing rights over pension (and often annuity) income to the country of residence, others permit the jurisdiction in which the pension income arises to levy tax, or provide for shared taxing rights in limited circumstances.

UK pensions paid to a non-UK tax resident are generally taxable only in the country of residence under domestic rules, unless the applicable DTA provides otherwise. Some treaties assign taxing rights exclusively to the country of residence, while others allow UK tax at source with relief available for foreign tax paid. Always check the relevant treaty provisions for pension and annuity income.

Where a DTA provides relief from UK tax, you may be able to claim relief at source (so that UK tax is reduced or not deducted) or a repayment where UK tax has already been withheld, using the appropriate HMRC treaty relief process.

If you reside in a country that does not have a DTA with the UK, your tax position may be more complex:

1. The UK may deduct tax from pension payments under domestic rules.
2. Your country of residence may also tax the same income under local legislation.
3. In some cases, unilateral tax credit relief under UK law may be available, although this is not guaranteed.

Accordingly, confirming whether a DTA exists, understanding how pension and annuity income is treated, and knowing how treaty relief is claimed should form a key part of retirement income planning for UK expats.

Local Taxation

It is essential to understand the local taxation rules that apply to pension income in your country of residence, as these can materially influence whether an annuity, drawdown, or a combination of both is more appropriate.

In many jurisdictions, foreign pension income is taxable, but the classification, timing, and rates of taxation often differ depending on the nature of the pension payment.

Key local tax considerations include:

• Annuity income: In some countries, annuity payments are taxed as regular earned income at progressive rates, which may reduce their net attractiveness despite income certainty.
• Drawdown withdrawals: Drawdown income may be taxed differently depending on whether withdrawals are treated as income, capital, or a mixture of both under local law.
• Tax-free lump sums: Lump sums that are tax-free under UK pension rules may still be partially or fully taxable in the country of residence.
• Timing of withdrawals: Your tax residency status in the year pension benefits are first accessed can significantly affect the overall tax outcome.

Certain jurisdictions also offer preferential tax regimes designed to attract internationally mobile professionals or retirees.

For example, Italy allows eligible individuals who become Italian tax residents to elect an annual substitute tax on qualifying foreign-source income, including pensions, for up to 15 years, rather than being subject to ordinary progressive taxation.

As a result, a pension income strategy that appears efficient under UK rules may produce a materially different net outcome once local tax legislation is applied.

For UK expats, understanding how annuity income and drawdown withdrawals are taxed locally is a key part of selecting an appropriate retirement income strategy.

Pension Transfers

If you intend to retire overseas, you may consider restructuring or transferring your UK pension to better align it with your long-term residency plans.

One option is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS), which is an overseas pension scheme that meets HMRC conditions to receive recognised transfers from UK-registered pension schemes.

Transfers to a QROPS made after 9 March 2017 will generally incur a 25% Overseas Transfer Charge (OTC) unless both of the following apply:

• You are tax resident in the same country in which the QROPS is established at the time of transfer.
• The transfer is within your Overseas Transfer Allowance (currently £1,073,100).

Recent law changes have removed the previous EEA and Gibraltar exemptions from the OTC. Transfers to overseas schemes that are not QROPS are normally treated as unauthorised payments and can result in tax charges of up to 55%, plus potential additional scheme charges.

Alternatively, many UK expats transfer their pension to an international Self-Invested Personal Pension (international SIPP).

An international SIPP remains a UK-registered pension scheme, meaning it does not constitute an overseas transfer and is therefore not subject to the Overseas Transfer Charge.

This approach allows expats to consolidate pensions, access drawdown or annuity options, and retain UK regulatory oversight while living abroad.

However, because an international SIPP remains within the UK pension system, UK pension tax rules continue to apply, including rules on tax-free lump sums and taxable withdrawals.

Pension income may also be taxable in the country of residence under local law and any applicable double tax agreement.

Given the complexity of QROPS regulation, overseas transfer charges, and cross-border tax treatment, it is generally advisable to obtain specialist financial and tax advice before transferring a pension or restructuring retirement income arrangements.