Don't Hand £500,000 to Aviva at 65 — Drawdown Keeps the Money Yours and Beats the Annuity If You Live Past 79

A 7.79% single-life level annuity at 65 pays £7,790 a year on £100,000. To get your capital back in nominal terms takes 12.8 years — you cross the breakeven at age 77.8. UK life expectancy at 65 is 84 for men and 87 for women. For a healthy 65-year-old, that headline rate is mostly your own money coming back to you, and the actual mortality credit — the bit the insurer pays you on top — is small.

Work through it. If you live to 84, you receive 19 × £7,790 = £148,010 in nominal cash from a £100,000 outlay. That is a 2.4% annualised internal rate of return over 19 years. The 10-year gilt — the bond the insurer is buying with your money — yielded 4.70% in March 2026 per FRED data. The insurer earns the difference. You are paying them roughly 230 basis points a year to assume the longevity risk and absorb their margin.

That chart is what the annuity industry wants you to see. Now look at the residual capital column they leave out.

Run the same £100,000 through drawdown at 4% withdrawal, invested in a 60/40 portfolio earning a real 4% net of charges (well below the 2026 Morningstar safe-withdrawal estimate of 3.9% for UK retirees). By age 85 the pot has paid you £90,100 in income and still holds £108,000. By age 95 it has paid £149,400 and holds roughly £91,000.

The annuity has paid you nothing once you are dead. The drawdown pot is still there. That residual matters in three concrete ways.

First, optionality. If you need £30,000 in year 8 for a kitchen, a daughter's deposit, or care, drawdown lets you take it. The annuity does not. You are locked into £7,790 a year regardless of what life throws at you.

Second, inheritance. From April 2027, unspent pensions sit inside the IHT estate at 40% headline. Worst case, your kids get 60% of the residual — about £55,000 of the £91,000 left at 95. From an annuity, they get zero unless you bought a guarantee period.

Third, control over draw rate. The 4% number is the starting position. In a strong market year, you can take 5%. In a 2022 — when global 60/40 portfolios lost 17% — you can drop to 3%. The annuitant has no such lever. They take £7,790 whether markets boomed or imploded. For the wider context on inflation and gilt-linked income, see our index-linked gilts piece and our 60/40 portfolio analysis. For the broader retirement income picture, the investing hub covers asset allocation principles in detail.

The level annuity buyer is making a bet that UK inflation will average 2% or lower for the next 25 years. The ONS reported CPI at 3.3% in the 12 months to March 2026, up from 3.0% the previous month, and the BoE has not hit its 2% target on a sustained basis since 2021. Run a 3% inflation assumption through the level annuity and the £7,790 in year one becomes £3,720 in real terms by year 25.

An escalating annuity solves this, sort of. But escalating annuities start at around 5.2% instead of 7.79% — you wait roughly 13 years for the income to catch up. The ABI noted escalating annuity sales hit 18,000 in 2025, up 10%, which tells you the market knows the level product has an inflation problem. But even the escalating annuity is locked in. If inflation runs at 5% you get the RPI uplift but you cannot increase the underlying.

Drawdown invested in equities and inflation-linked gilts inflates with the price level by design. The FTSE 100 has paid a dividend yield above 3.5% since 2022 and the index re-rates against nominal earnings. If wages and prices double over 20 years, so does the capital base your withdrawal rate applies to. The annuity does not have that property.

The standard annuity sales line is that FSCS protects 100% of the annuity contract with no upper limit, versus £85,000 for investment platforms. True, and irrelevant for most people. Aviva, L&G, Just, and Canada Life have not failed. The systemic risk on a regulated UK insurer with PRA oversight and Solvency II capital buffers is genuinely low.

More importantly, the £85,000 FSCS investment limit is per platform per person — split the pot across two platforms and you get £170,000 covered. Split across three and you get £255,000. The protection issue is solvable with diversification; the irreversibility of the annuity is not. For more on platform selection for drawdown, see our SIPP comparison context and the Interactive Investor flat-fee review.

The FSCS argument is also a category error. The £85,000 cap protects against platform failure, not market loss. If you hold £400,000 in a SIPP on AJ Bell and the FTSE drops 30%, the FSCS does nothing because AJ Bell did not fail — your underlying holdings simply repriced. The same market move happens to the gilts the annuity provider holds; you just do not see it because the insurer absorbs the volatility and pays you the contractual rate. You are paying the insurer to smooth volatility you do not actually need smoothed at 65 with a 25-year horizon.

From 6 April 2027, unspent pensions are inside the IHT estate. This is the Chancellor's most pension-relevant decision in a decade and the annuity lobby is leaning on it hard. The honest version is: drawdown's inheritance edge got smaller, not zero.

Work the numbers. £500,000 unspent at death, full 40% IHT applies, beneficiary withdraws as taxed income at 20% basic rate: net £240,000 to your kids. From an annuity with no guarantee period: net £0. Even buying a 30-year guaranteed annuity for the inheritance angle gives up around 50 basis points of headline rate (so 7.3% instead of 7.79%) and only protects the income stream for the guarantee period — not the capital.

The other escape valve is to spend it. The post-2027 game is now to use the pension for income before death rather than hoarding for inheritance. That is exactly what drawdown is built for. The annuity locks you out of accelerating withdrawals in your 80s when you might prefer to gift to children or fund care without depleting other assets.

For wider tax-planning context on this transition, see our pensions hub and the recent SIPP vs LISA analysis.

Even if you ultimately want guaranteed income, buying at 65 is not the right entry point. Annuity pricing has a mortality component that improves with age. A 75-year-old healthy male can typically get 9.5-10.5% on a single-life level annuity today, compared to 7.79% at 65. The reason is simple — the insurer expects to pay for fewer years.

The ABI flagged this trend in 2025. Sales to those aged 70 and older rose 8% — the fastest-growing age band. The market is voting for delay. The optimal sequence for many retirees is: drawdown from 55 to 75, then partial annuitisation at 75 to lock in longevity insurance on the residual. By 75 you also have better information about your health, your spending pattern, and whether your other assets need to fund care.

Locking in 7.79% at 65 for life means missing the structurally better rate at 75 by a decade. If gilt yields fall, you would lose some of that improvement — but the mortality credit alone is worth roughly 200 basis points of the gap. The window the Money Helper guarantee income tool is selling at 65 is the entry point. The exit ramp at 75 is where the rates get genuinely interesting.

This article is for informational purposes only and does not constitute financial advice. Pension drawdown carries investment risk including sequence-of-returns risk that can deplete a pot in poor market years. You should seek independent financial advice from a regulated adviser before making any retirement income decisions. Past performance is not a reliable indicator of future returns.