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Annuity vs. Pension: Differences and Key Considerations for UK Expats

Last updated on February 20, 2026 • About 14 min. read

Author

Graham Bentley

Private Wealth Director

| Titan Wealth International

This article is provided for general information only and reflects our understanding at the date of publication. The article is intended to explain the topic and should not be relied upon as personalised financial, investment or tax advice. We work with clients in multiple jurisdictions, each with different legal, tax and regulatory regimes. This article provides a generic overview only and does not take account of your personal circumstances; you should seek professional financial and tax advice specific to the countries in which you may have tax or other liabilities.

Determining how to access your retirement funds is a crucial decision with significant long-term implications for your financial security in later stages of life.

In practice, however, the terminology surrounding retirement income is often used inconsistently, which can make informed decision-making more difficult than it should be.

To provide clarification and guidance, this annuity vs. pension comparison will explain the key distinctions between these two sources of retirement income and outline how they may be combined into an effective retirement strategy for individuals with UK-registered pensions who are resident outside the UK.

It focuses on how UK pension rules, taxation and cross-border considerations affect retirement income decisions for UK expats.

What You Will Learn

  • How pensions differ from annuities.
  • What are the principal advantages and limitations of each.
  • Why (and how) to combine an annuity with a pension.
  • Which considerations UK expats should evaluate before accessing pension benefits.
  • How UK tax rules, cross-border taxation and currency factors may influence retirement income decisions.

What Is the Difference Between a Pension and an Annuity?

A pension represents the retirement savings you have accumulated during your working years. In the UK, this may take the form of a defined contribution (DC) pension (an invested pot of savings) or a defined benefit (DB) pension (a promised income based on scheme rules and typically payable from the scheme’s normal retirement age).

By contrast, an annuity is a specific insurance product that can be purchased, often using DC pension funds, to convert part of your retirement capital into a predictable income stream.

In exchange for a lump sum payment, the insurer pays an income for either a lifetime or a predefined period, depending on the type of annuity and the options selected.

Once purchased, most annuities cannot be altered or surrendered, and the capital used to buy the annuity is no longer accessible.

How Do UK Pensions Provide Retirement Income?

A UK pension, particularly a defined contribution pension, allows your savings to accumulate in an invested pot during your working years. The pot’s value may increase or decrease according to investment performance until you access the benefits in retirement.

Upon reaching the normal minimum pension age (55 at present, increasing to 57 in April 2028, subject to transitional protections for certain schemes with a protected pension age), you can usually access the defined contribution benefits through two components:

  1. Taking a 25% tax-free portion (typically up to 25% of the amount crystallised, subject to your remaining Lump Sum Allowance, which is £268,275 for most individuals and may be lower if benefits have previously been taken).
  2. Using the remaining balance to provide ongoing (taxable) retirement income.

In practice, many UK retirees access their pensions through flexi-access drawdown, which allows them to withdraw income as needed, either as ad hoc lump sums or regular payments, while keeping the remainder invested, providing a high degree of flexibility. However, taking taxable income through flexi-access drawdown will normally trigger the Money Purchase Annual Allowance (MPAA), which limits future defined contribution pension contributions.

What Are the Benefits and Shortcomings of Pension Drawdown?

The primary advantage of pension drawdown is that you retain a high degree of control over your retirement income.

You can adjust the amount and timing of withdrawals to reflect evolving cash flow needs, allowing you to settle both ongoing living costs and larger, one-off expenses.

Additional advantages may include:

  • Investment potential: The funds that remain in the drawdown arrangement stay invested, allowing your pension pot to participate in further market growth, although investment returns are not guaranteed and capital is at risk.
  • Tax planning flexibility: Because withdrawals are generally taxed as ordinary income under UK income tax rules (unless treaty relief applies for non-UK residents), flexible withdrawals support tax planning by helping you manage taxable income across tax years and, where possible, remain within preferred tax bands.
  • Estate planning: Unaccessed pension funds can typically be transferred to beneficiaries, with the tax treatment depending on factors such as your age at death and the method of benefit distribution. Under current legislation, death benefits from defined contribution pensions are generally outside the deceased’s estate for UK inheritance tax purposes, although the government has announced proposals to bring certain unused pension funds within the scope of inheritance tax from 6 April 2027, subject to legislation being enacted.

Despite these benefits, drawdown carries the possibility of outliving your pension pot—the longevity risk – particularly in the following circumstances:

  • You make significant withdrawals early in retirement.
  • You underestimate future spending needs.
  • You monitor your withdrawals ineffectively.

Another notable risk involves withdrawals (especially substantial ones) during market downturns.

Large withdrawals during periods of poor investment performance can permanently reduce the capital available to recover when markets improve, a phenomenon often referred to as sequence of returns risk, making long-term sustainability more difficult.

Given these risks, drawdown typically requires ongoing monitoring and disciplined financial planning. Professional advice can help develop a withdrawal strategy that aligns with your expected longevity, investment risk tolerance, and spending needs, ensuring your pension pot can support your desired lifestyle throughout retirement.

Planning How to Structure Your Pension Income as a UK Expat?

How Flexible Access Can Affect Future Pension Contributions

If you access your defined contribution pension flexibly, this may affect how much you can contribute to pensions in the future.

Once you take taxable income from a flexi-access drawdown arrangement, you will normally trigger the Money Purchase Annual Allowance (MPAA).

As of the 2025/26 tax year, the MPAA is £10,000 per tax year (and is not currently subject to carry forward from previous tax years).

This means:

  • Future contributions to defined contribution pensions are limited to £10,000 per year.
  • Contributions above this level may result in an annual allowance tax charge.
  • The standard annual allowance (currently £60,000 for most individuals, subject to tapering for higher earners) will no longer apply to money purchase contributions once the MPAA is triggered.
  • The restriction applies even if you later return to work or resume contributions.

Importantly, taking only your 25% tax-free lump sum does not trigger the Money Purchase Annual Allowance.

Similarly, purchasing a lifetime annuity without first accessing flexi-access drawdown will not normally trigger the MPAA, provided the annuity does not permit flexible income withdrawals.

The reduced annual allowance is generally activated only once taxable flexible income is withdrawn from a defined contribution pension.

For UK expats, this distinction can be particularly relevant if you intend to return to the UK workforce, continue making pension contributions while working overseas, or expect to receive employer pension contributions in the future.

Before accessing taxable income, it is advisable to consider whether preserving your full annual allowance may provide greater long-term planning flexibility.

How Do Annuities Provide Retirement Income?

An annuity converts the allocated portion of your pension into a regular income stream, the duration of which primarily depends on the selected type:

Annuity Type Overview
Lifetime annuity Pays a guaranteed income for the remainder of your life (or both you and a partner if you purchase a joint-life annuity), subject to the financial strength of the insurer and the terms of the contract.
Fixed-term annuity Pays a guaranteed income for a set period (e.g., 5 or 10 years). Upon the term’s expiration, any remaining value (maturity lump sum) can be withdrawn or utilised to purchase another annuity, with the maturity value depending on the original terms selected and prevailing rates at that time.

The specific income will primarily depend on the lump sum utilised to purchase the annuity and the current annuity rates, which are significantly influenced by prevailing interest rates at the time of purchase. However, the annuity rate will also reflect personal factors such as:

  • Age
  • Overall health
  • Additional features
  • Whether you select single-life or joint-life cover

Although many annuities provide a level (fixed) income, you may choose options that increase payments over time. These may include:

  • Fixed escalation (for example, 3% per year).
  • Index-linked increases, often linked to inflation measures such as the Retail Prices Index (RPI) or other specified indices, depending on the provider.
  • Enhanced annuities reflecting health or lifestyle factors.

While escalation or indexation can help preserve purchasing power, the starting income will generally be lower than that of a comparable level annuity.

For UK expats, inflation considerations can be more complex:

  • UK-linked increases may not reflect inflation in your country of residence.
  • Annuity payments are typically denominated in sterling, meaning exchange-rate movements may affect your real income if your expenditure is in another currency.
  • A level annuity can lose substantial real value over a long retirement.
  • Longer life expectancy increases the importance of inflation protection.

Balancing initial income against long-term purchasing power is therefore a key decision when selecting annuity features.

Regardless of the type and features, an annuity is typically favoured by retirees who can accurately predict their expenses and wish to receive a guaranteed income throughout retirement.

However, once purchased, most lifetime annuities cannot be amended or surrendered, making the initial structuring decision particularly important.

What Are the Advantages and Disadvantages of Annuities?

The most prominent advantage of an annuity is the income certainty it provides. You may choose to allocate a portion of your retirement savings to purchase an annuity that delivers a predictable income stream, which can help cover essential expenses and reduce longevity risk.

In the UK, annuities issued by UK-authorised insurers are generally treated as long-term insurance products and may be eligible for protection under the Financial Services Compensation Scheme (FSCS), which can provide 100% protection for long-term insurance contracts with no upper monetary limit, subject to eligibility and the rules of the scheme at the time of claim.

Other notable benefits of annuities include:

  • Simplicity: Once in payment, an annuity requires limited ongoing decision-making compared with investment-based drawdown strategies.
  • Budgeting support: The predictable income provided by an annuity enables you to plan monthly or quarterly budgets without extensive considerations.
  • Potentially higher income for health and lifestyle factors: If your medical history or lifestyle is expected to reduce life expectancy, you may qualify for an enhanced (impaired life) annuity, which can offer a higher income than standard rates. Conditions such as diabetes, heart disease, high blood pressure, or a history of smoking may increase the annuity rate available.

However, for UK expats:

  • Medical underwriting requirements may vary.
  • Providers may require UK-recognised medical evidence.
  • Availability of enhanced terms can differ between insurers.

Full and accurate disclosure is essential, as incomplete medical information may affect the rate offered.

Although an annuity’s fixed nature is a considerable advantage, it is also its most significant limitation. Once you purchase an annuity, you generally cannot access the annuitised capital or increase withdrawals to meet unexpected substantial expenses.

Furthermore, an annuity may leave little or no residual value for beneficiaries. However, many contracts offer death benefit options, such as a guaranteed period, joint life continuation, or value protection, although these features typically reduce the initial income level compared to standard annuities and may affect the overall value ultimately paid to beneficiaries depending on how long you live.

Can You Combine Pension and Annuities?

Despite their differences, pensions and annuities are closely linked in practice, as the former is often used to purchase the latter. One example of a combined retirement strategy may involve:

  • Taking the 25% tax-free lump sum (subject to your remaining Lump Sum Allowance).
  • Using part of the remaining retirement savings (or the tax-free cash) to purchase an annuity to cover essential expenses.
  • Keeping the balance in flexi-access drawdown to enable flexible withdrawals while remaining invested.

Such an approach can help diversify retirement income by combining the predictability of an annuity with the flexibility of drawdown.

Combining pension income with an annuity may also be sensible from a tax perspective. The UK government has announced proposals to bring certain unused pension funds and death benefits within the scope of inheritance tax (IHT) from 6 April 2027, subject to legislation being enacted. If implemented, this could reduce the amount your beneficiaries ultimately receive.

By purchasing an annuity, you may lower the amount of unused pension wealth left to be passed on to heirs. However, this may also convert capital that could otherwise fall outside your estate (under current rules) into income that forms part of your taxable estate if retained, and therefore requires careful financial planning with a complete understanding of the related tax consequences.

The inheritance tax treatment will depend on your UK residence history and whether you are treated as a long-term UK resident for inheritance tax purposes, as well as the rules of your country of residence.

To effectively structure your retirement income, it is advisable to seek financial guidance from experts, such as Titan Wealth International. Our advisers will examine your circumstances to devise a personalised, granular strategy that helps achieve your retirement objectives.

How Much of Your Pension Pot Should You Turn Into an Annuity?

The amount of pension you should annuitise is highly individual and depends on various personal factors.

It is critical to accurately estimate your financial needs, as you typically cannot modify the annuity upon purchase and most lifetime annuities cannot be surrendered once established.

You should consider your life expectancy as the starting point and take into account factors such as your:

  • Retirement age.
  • Overall health, including specific conditions and diagnoses.
  • Family history.

You may begin by calculating the average life expectancy through the government’s official calculator. Upon obtaining the estimate, consider personal factors to ensure a more accurate prediction. For UK expats, you should also consider how residency, healthcare access and lifestyle changes in your country of residence may influence longevity expectations.

After estimating your life expectancy, consider the more granular factors to determine the right annuity amount:

  • Essential living costs (monthly or annually).
  • Inflation.
  • Additional income sources.
  • Target lifestyle.
  • Currency of expenditure if you reside outside the UK.

An annuity’s primary purpose is to provide security when it comes to base-level costs, so they should be your reference point.

You can then add any estimated income required to support your lifestyle or specific goals (e.g., travel). Many retirees choose to use annuity income to cover essential expenditure, while retaining invested assets to fund discretionary spending and provide liquidity.

After estimating the amount of regular income you need, explore different insurers and obtain quotes to compare your options.

Many providers offer online annuity calculators, which help approximate the portion of your pension pot that can be annuitised. It is also advisable to use the open market option to compare rates across providers rather than accepting the default offer from your existing pension provider.

Due to the irreversible nature of this decision, it is best to consult a financial expert before finalising the annuity purchase.

How Should UK Expats Approach Annuity Purchases?

If you reside outside of the UK (or intend to retire abroad), purchasing an annuity may be more complex.

Many UK annuity providers restrict availability to UK residents, meaning access to certain products may be limited upon relocating and underwriting or servicing arrangements may differ for non-UK residents.

Where UK products are unavailable, you may consider exploring international annuity options that cater to a global clientele. When comparing options, it is crucial to consider:

  • Annuity rates (especially compared to domestic providers).
  • Payout currency availability.
  • Fees and other charges.
  • The regulatory regime governing the provider and whether equivalent consumer protection applies.

Beyond product availability, it is crucial to understand the tax treatment of pension income and annuity payments.

UK pension income (including annuity payments and drawdowns) is not automatically taxable in the UK: the allocation of taxing rights may be affected by any applicable double taxation agreements (DTAs) and your tax residency status.

In many cases, a DTA may permit relief from UK tax for non-residents, and eligible individuals can sometimes arrange for pension payments to be made gross by claiming treaty relief through the appropriate HMRC process (for example, by submitting the relevant double taxation relief forms to HMRC before payments are made).

For instance, under the UK-UAE DTA, private UK pension income may be taxable only in the UAE if you are considered a UAE tax resident.

Considering that the UAE currently imposes no personal income tax, UK pensions may be received free of local income tax in the UAE, provided treaty conditions are met and UK tax relief is properly claimed. However, the treatment of UK State Pension and certain public service pensions may differ under treaty rules.

Finally, consider the logistical specifics of purchasing an annuity while living abroad. The majority of UK pension schemes will pay into a UK bank account, so you need to open a UK sterling account (or utilise a multi-currency account) in your country of residence to receive payments in GBP.

Some providers may also pay directly to certain overseas bank accounts, subject to their operational policies and anti-money laundering requirements.

Currency Risk for UK Expats

For individuals living outside the UK, currency exposure is a critical consideration when deciding between drawdown and an annuity.

Most UK annuities are denominated and paid in sterling. If your living expenses are primarily in another currency (such as EUR, USD or AED), exchange-rate fluctuations may materially affect your effective income.

For example:

  • If sterling weakens against your local currency, your purchasing power may increase.
  • If sterling strengthens, your local spending power may fall.
  • Currency volatility can create income uncertainty, even where the annuity itself is guaranteed.

By contrast, pension drawdown may allow greater flexibility:

  • Investments can be diversified across currencies.
  • Withdrawals can be timed or adjusted.
  • Assets may be aligned more closely with your country of residence.

You should also consider inflation alignment. A UK inflation-linked annuity may increase in line with UK inflation measures, but this does not guarantee protection against inflation in your country of residence. If local inflation materially exceeds UK inflation, your real purchasing power could still decline over time.

For expats, matching the currency of essential expenditure with income sources can be an important part of managing long-term financial stability.

Do Annuities Minimise Pension Longevity Risk?

Annuities directly guard against the risk of outliving your pension pot by providing guaranteed payments for the remainder of your life (or an agreed-upon term if you choose the fixed-term options).

You will receive payments regardless of market conditions and, subject to the terms of the contract, even if you live significantly longer than average life expectancy.

Payments are dependent on the financial strength of the insurer, although UK-authorised insurers are subject to prudential regulation and may fall within the scope of FSCS protection.

If you live longer than actuarial expectations, an annuity will pay out more total income than you invested in it, which is not an advantage you can expect with a drawdown strategy that relies on finite invested capital.

However, an annuity does not guarantee that you will achieve your financial objectives throughout retirement. It cannot accommodate changes such as:

  • Relocation to a country with a significantly higher standard of living.
  • Sudden diagnoses that require extensive financial support.
  • Unexpected assistance your family may need.

In addition, annuity income is typically fixed or subject to predefined escalation terms, meaning it may not adjust to unforeseen expenditure beyond those parameters.

Such events can occur at any point in your retirement, and relying solely on annuity income may prevent you from responding effectively. This is why it is recommended to have lump sums or liquid assets that you can utilise as a liquidity buffer, rather than focusing your capital exclusively on an annuity.

From this perspective, the regularity of your income does not necessarily equate to security. You should devise a retirement strategy that enables asset diversification and serves both immediate and long-term objectives.

Complimentary UK Expat Retirement Income Consultation

Deciding how much of your pension to place into an annuity — and how much to retain in drawdown — requires careful consideration of UK pension rules, cross-border taxation, currency exposure and long-term income sustainability.

Structuring retirement income as a UK expat involves more than selecting a product; it requires aligning flexibility, security and tax efficiency across jurisdictions.

In a complimentary introductory consultation with Titan Wealth International, you will:

  • Review how annuities and drawdown can be combined to secure essential expenditure while preserving flexibility and liquidity.
  • Understand how UK tax rules, double taxation agreements and currency exposure may affect your retirement income abroad.
  • See how Titan Wealth International can help you structure a retirement strategy aligned with your residency status, longevity expectations and estate-planning objectives.

Key Takeaway

While there are various ways to access your retirement savings, annuities remain a common choice due to their income predictability and simplicity.

In many cases, it can be appropriate to allocate a specific portion of your pension pot to an annuity to secure essential expenditure, while retaining sufficient capital for drawdown and other flexible strategies to manage liquidity, investment growth potential and changing expenditure needs.

Estimating your retirement needs and devising a financial plan accordingly can be challenging, especially if retirement is not imminent. You must consider both personal and macroeconomic factors to create accurate income projections, as well as tax rules in both the UK and your country of residence, which may be overwhelming if done independently.

Our advisers at Titan Wealth International can provide assistance and continuous guidance on structuring and optimising your retirement income.

We can develop a retirement plan that aligns your income sources to support long-term security, as well as advise on tax efficiency and cross-border considerations to accommodate your residency circumstances, subject to applicable regulatory permissions and the laws of the jurisdictions involved.

The information provided in this article is not a substitute for personalised financial, tax or legal advice. You should obtain financial advice and tax advice tailored to your particular circumstances and in respect of any jurisdictions where you may have tax or other liabilities. Titan Wealth International accepts no liability for any direct or indirect loss arising from the use of, or reliance on, this information, nor for any errors or omissions in the content.

Author

Graham Bentley

Private Wealth Director

Graham Bentley is a Private Wealth Director with 18 years of experience in offshore financial planning, specialising in tax-efficient investment strategies for high-net-worth individuals. Having led financial advisory firms in Abu Dhabi, Qatar, and India, he brings deep expertise in wealth management, succession planning, and cross-border estates. A CISI and Series 65-qualified professional, Graham provides tailored financial solutions to international clients. Based in Dubai, he writes on wealth management helping clients make informed financial decisions.

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