Lock In a 7.79% Annuity at 65 — Drawdown's 4% Rule Hasn't Worked Since Inflation Came Back

Take a £200,000 pot at 65. Buy a single-life level annuity at 7.79% and you receive £15,580 a year, guaranteed, until you die. Take the same pot into drawdown and apply the most quoted UK safe-withdrawal rate — Morningstar's 2026 starting figure of 3.9% — and you get £7,800 in year one. The annuity pays exactly twice as much in cash for as long as you live.

The drawdown defender always replies that the safe-withdrawal rate assumes a 30-year horizon with no portfolio failure. That is the point. The 3.9% number is the income you can take without running out — it is not a recommendation, it is a survival ceiling. The annuity at 7.79% has no horizon. It pays the same in year 31 as it did in year one, and it pays in year 35 if you live that long.

The gap is not a rounding error. It is two-to-one. To match the annuity from a drawdown pot, you would have to take 7.79% a year — a rate the Bengen study itself flagged as a ruin scenario in roughly half of historical UK retirement windows.

Annuity pricing is not arbitrary. Insurers back annuity books with long-dated gilts and corporate bonds, then add a credit spread, mortality assumptions, and their margin. When 10-year gilt yields sit at 4.70% — the latest FRED reading for March 2026 — annuity rates can clear 7%. When yields fall back, so will the quotes.

This is not a forecast. It is what happened the last time gilt yields collapsed. Between 2009 and 2021 the 10-year traded between 0.1% and 2.5%, and annuity rates for a 65-year-old crashed from over 7% to below 5%. The same pension pot bought a third less retirement income. Anyone who said 'I'll wait for a better rate' in 2014 waited a decade and got worse quotes every year.

The Bank of England has cut Bank Rate four times since November 2024, from 5.00% to 3.75%, and the market is pricing more. The annuity rate you see today is the rate you can lock in today. There is no equivalent product in retail finance that gives you a guaranteed 7.79% gross yield for life from a regulated UK counterparty. For more on how gilts price retirement income, see our gilts hub.

A 65-year-old British woman has a life expectancy of around 87. A 65-year-old man, around 84. But those are averages. The 90th percentile woman lives to 96. One in ten 65-year-old men will see their 92nd birthday. If you are healthy enough to consider drawdown — and you almost certainly are if you are reading this article — you are statistically pulling the right tail of those distributions.

Drawdown does not solve longevity risk. It externalises it. Every year you live past your modelled life expectancy is a year your portfolio has to keep funding income from a smaller base. The annuity solves it by definition. The insurer pools your mortality risk with 87,599 other annuity buyers in 2025, so the people who die at 70 cross-subsidise the people who live to 95. That cross-subsidy — called the mortality credit — is roughly 1.5 to 2 percentage points of extra yield over what a self-funded gilt ladder would deliver.

That is the bit drawdown advocates never put in their spreadsheets. They compare annuity income with portfolio growth and call it a fair fight. It is not. The annuity rate already has the longevity premium baked in. Replicating it from your own portfolio means buying gilts and assuming you die on schedule. Half of people will not.

The standard objection to a level annuity is that inflation will eat the income. Fair enough. CPI ran at 11.1% in October 2022 and a level £15,580 would have lost 30% of its real purchasing power in three years.

Two answers. First, CPI is now running at 3.3% in the 12 months to March 2026 per ONS — sticky but not catastrophic — and the BoE has already cut Bank Rate four times since November 2024. The 2022 inflation shock was driven by a war and an energy crisis, and even then the index-linked gilt market did not signal a permanent regime change. UK 10-year inflation breakevens trade in the 3.2-3.5% range, not 6%.

Second, you can buy an escalating annuity. The ABI reported 18,000 escalating annuities sold in 2025, up 10% on the year and the highest figure since 2013. An RPI-linked annuity starts around 5.2% instead of 7.79%, but the income rises every year. If you are 65 and expect to live 25-plus years, the crossover point sits around year 13. The maths favours level if you discount future cash hard, and escalating if you want certainty in real terms.

Drawdown survives inflation only if your equity allocation outperforms inflation by enough to fund withdrawals. From 2000 to 2010, the FTSE 100 lost money in nominal terms. That is the scenario that breaks the 4% rule. The annuity does not care.

If your annuity provider goes bust, the Financial Services Compensation Scheme covers the contract at 100% with no upper limit because pension annuities are long-term insurance contracts. That is the strongest protection in retail UK finance.

Drawdown sits on an investment platform. Those are protected to £85,000 per platform per person for the platform failure shortfall — useful, but capped, and it only covers the platform going bust, not your funds losing value. If you hold £500,000 in drawdown on a single platform, £415,000 of it is sitting outside the FSCS limit.

This matters more than people admit. Aviva, L&G, Just, and Canada Life write the bulk of UK annuities. None has failed. But if one did, the FSCS protects the income stream completely. Few retail products in the UK can claim that. For broader context on platform protection, our Hargreaves Lansdown review covers how investment FSCS cover actually works.

Drawdown earns its keep in three scenarios. One: you have a large defined-benefit pension covering essentials, so the DC pot is genuinely discretionary. Two: you have terminal or significantly impaired health and the longevity insurance is negative-value (in which case an enhanced annuity, paying 15-25% more, usually still wins). Three: you want to bequeath the pot and value the inheritance more than your own retirement income.

The third reason got weaker in November 2024. The Chancellor announced that unspent pensions will be inside the IHT estate from 6 April 2027. At 40% headline IHT, plus income tax on beneficiary withdrawals after age 75, a £500,000 unspent drawdown pot left at 80 could lose 67% to HMRC before your kids see a penny. That changes the inheritance maths sharply against drawdown for anyone with a six-figure pot.

If none of those three reasons applies to you, drawdown is not a strategy. It is a bet — on markets, on your own discipline, and on you dying close to the modelled date. The annuity is the contract. For wider context on retirement income trade-offs, see our pensions hub and our take on SIPPs versus LISAs at 32.

This article is for informational purposes only and does not constitute financial advice. Annuity decisions are irreversible and depend on your full financial picture, health status, and dependents. You should seek independent financial advice from a regulated adviser before making any retirement income decisions. Past performance and current rates are not reliable indicators of future outcomes.