You have worked, saved and contributed for thirty or forty years, and now the pension provider sends a letter with a number on it and a form to sign. Take the guaranteed income for life, or take the pot and manage it yourself. It feels like a one-way door, and in most countries it more or less is, so it is worth slowing down before you tick a box.
The honest answer is rarely “annuity” or “ETFs” as an either/or. For most Europeans with a reasonably sized pot, the right structure is both: enough guaranteed income to cover what you must spend, and a simpler, growth-oriented portfolio for everything else. Below is the framework I use when friends and readers ask me this, plus the numbers and trade-offs behind it.
If this topic matters to your portfolio, start with my REIT ETFs guide.
I am not a pensions adviser and this is not personalised advice. Annuity pricing, lump-sum tax treatment and even whether you are allowed to take a lump sum at all vary enormously by country and by scheme. Treat every figure here as illustrative and verify the current rules with your own pension provider or a body such as EIOPA, the EU’s pensions and insurance regulator, before you sign anything.
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An annuity is longevity insurance dressed up as an investment product. You hand over a lump sum, the insurer pools your risk with thousands of other retirees, and in exchange you get a fixed monthly payment for as long as you live, however long that turns out to be. If you live to 100, the insurer keeps paying. If you die at 68, the insurer keeps the balance (unless you paid extra for a guarantee period or spousal continuation).
That pooling is genuinely valuable. It is the one product that removes both market risk and the risk of outliving your money, which is exactly the risk most people underestimate at the point of retiring. The cost is threefold: the payout rate is usually unattractive when interest rates are low, a non-indexed annuity gets quietly eaten by inflation over 20-30 years, and once you have annuitised, that capital is gone from your estate — no lump sum for a spouse or children beyond whatever guarantee period you bought.
What a DIY ETF drawdown actually gives you
The alternative is to keep the pot invested, typically in a mix of global equity UCITS ETFs and some government or investment-grade bond exposure, and draw an income from it yourself. The appeal is obvious: you keep control, the money can keep growing, and whatever is left when you die goes to whoever you choose rather than to an insurer’s balance sheet.
The cost is that you are now carrying the two risks the annuity would have removed. Market risk, because a serious downturn early in retirement does more damage than the same downturn ten years in (more on that below), and longevity risk, because nobody can tell you in advance whether your money needs to last 15 years or 35. You also need the discipline to actually stick to a sustainable withdrawal rate rather than spending whatever the account happens to show in a good year.
Sequence-of-returns risk, in plain terms
This is the concept that trips up more retirees than any single fee or fund choice. If your portfolio falls 30% in year two of retirement while you are also withdrawing income, you are selling a much larger share of a much smaller pot than someone who hits that same 30% fall in year twenty, once compounding has done more of the work. Two retirees with identical average returns over 25 years can end up with wildly different outcomes purely because of the order those returns arrived in. It is why a portfolio that looks fine on a 30-year average chart can still fail a specific retiree in a specific decade.
Annuity vs DIY ETF drawdown, side by side
| Feature | Annuity | DIY ETF drawdown |
|---|---|---|
| Longevity risk | Removed — paid for life | Yours to manage |
| Market/sequence risk | None once purchased | Real, especially in early retirement |
| Inflation protection | Weak unless you pay extra for indexation | Equities historically outpace inflation over time |
| Flexibility | Very low — fixed income, hard to reverse | High — adjust withdrawals, access lump sums |
| Inheritance | Usually none beyond a guarantee period | Whatever remains passes to your estate |
| Growth potential | None — payout is fixed at purchase | Yes, but not guaranteed |
| Effort required | One decision, then none | Ongoing rebalancing and discipline |
The floor-and-upside approach
Once you lay the two options side by side, the case for a blend becomes obvious. Cover your non-negotiable spending — housing, food, utilities, insurance, basic healthcare costs — with a “floor” of guaranteed income: your state pension plus, if it makes the numbers work, a partial annuity. Then invest the remainder in a straightforward global equity and bond portfolio using UCITS ETFs, and draw from that for discretionary spending, travel and the occasional large expense.
This way, a bad market year is uncomfortable but never catastrophic, because your groceries and rent were never depending on the stock market. You still keep meaningful upside with the portion you did not annuitise. Reasonable people disagree on the exact split — some annuitise enough to cover 70-100% of essential costs, others keep annuitisation to the bare minimum and lean on a conservative withdrawal rate instead, similar to the logic behind the well-known 4% rule debate. There is no single correct percentage; it depends on your other guaranteed income, your health and how much you value flexibility over certainty.
A worked example
Say you retire with a pot of roughly €300,000 and a state pension covering about half your essential monthly costs. A reasonable split might use €80,000-€120,000 to buy a partial annuity that, combined with the state pension, fully covers essential spending, leaving €180,000-€220,000 invested in a global ETF portfolio (something like 60-70% equities, 30-40% bonds, shifting more conservative over time) for discretionary spending. A withdrawal rate that flexes with how markets actually behave, rather than a fixed percentage regardless of conditions, tends to hold up far better than either “spend whatever it earns” or a rigid rule followed blindly through a downturn. Treat every number here as an illustration, not a target to copy.
Tax and country differences (verify locally)
How a lump sum is taxed, whether you can take one at all, and how annuity income is taxed once it starts paying out differs by country and scheme type — occupational, personal and third-pillar products are often treated quite differently even within the same country. Some jurisdictions tax a lump sum favourably up to a threshold and then at marginal rates above it; others tax annuity income as ordinary income with no special treatment. This is one area where a conceptual understanding is not enough — confirm current thresholds with your national pensions authority or a local tax adviser, since the tax difference alone can swing which option is better for you.
A decision checklist before you sign anything
Work through this in order: add up your genuinely essential monthly spending, separate from anything discretionary. Check what your state pension and any existing guaranteed income already covers of that figure. Get an actual annuity quote, not an estimate, since rates move with bond yields and your age. Decide honestly how you would react, financially and emotionally, to a 30% drop in an invested portfolio during the first three years of retirement. Consider your health and family longevity, since annuities become mathematically more attractive the longer you expect to live. Only once you have those answers does the split become an informed decision rather than a guess.
My verdict: what I’d actually do
If your essential spending is already fully covered by a state pension and other guaranteed income, I would not annuitise anything extra — I would keep the lump sum invested in a low-cost global ETF portfolio, drawing conservatively and letting a tool like a safe withdrawal rate calculator guide the pace rather than guessing. If essential spending is not fully covered, I would use a partial annuity to close that gap, no more, and invest the rest. I would resist annuitising the whole pot purely for peace of mind, because that comes at the real cost of flexibility and any inheritance, and it is usually not necessary once the floor is covered. I would also build in a bond glidepath rather than a fixed allocation for thirty flat years, and think carefully about whether to draw income by selling units gradually or living off natural yield. A bucket-based structure can make the floor-and-upside split easier to manage day to day than a single blended account.
Frequently asked questions
Q: Is it ever right to annuitise 100% of a pension pot?
A: Occasionally, yes — if you have no other assets, a shorter-than-average life expectancy is not a factor, and you value absolute certainty over flexibility and inheritance. For most people with other savings or a state pension already covering part of essentials, a partial annuity plus an invested portion serves better.
Q: What is sequence-of-returns risk in one sentence?
A: It is the risk that a market downturn early in retirement, combined with regular withdrawals, permanently damages your portfolio in a way the same downturn later in retirement would not.
Q: Can I buy an annuity later if I choose full drawdown now?
A: In many schemes yes, though annuity rates depend on interest rates and your age at purchase, so a later annuity could be better or worse priced than one available today. Check your specific scheme’s rules, since some lump-sum options are one-time and irreversible.
Q: How much of my pot should go into an annuity versus ETFs?
A: There is no universal percentage. The common approach is to annuitise only enough, combined with your state pension, to cover essential monthly spending, and invest the rest — for many Europeans that ends up somewhere between 20% and 50% of the total pot, but your figure depends entirely on your own numbers.
Q: Are annuity payouts taxed the same as investment withdrawals?
A: Usually not, and the difference varies significantly by country and pension type. Confirm current treatment with your national pensions or tax authority — Ireland’s Pensions Authority is one example that publishes plain-language guidance on retirement options — before deciding, since it can meaningfully change which option nets you more.
Q: What happens to my ETF portfolio if I die early in retirement?
A: Whatever remains passes to your estate under normal inheritance rules in your country, which is one of the main advantages over a standard annuity without a guarantee period, where the remaining value is typically kept by the insurer.
This guide is part of our hub on investing a windfall, inheritance or payout — browse the full cluster for related situations.
European UCITS/ETF investor with 11+ years building a global dividend and index portfolio, and founder of Financial Expert Class. I write every guide here from first-hand experience investing across EU brokers and tax regimes — not theory. More about me →