Life annuity or drawdown plan: which is better for the AVD?

Tilman Freyenhagen

Published on 25 July 2026 · Updated on 7 August 2026 · Managing Director & Partner, Alsterspree Verlag GmbH

The fundamental choice in the Altersvorsorgedepot: life annuity or drawdown plan

The choice between a lifelong life annuity and a fixed-term drawdown plan for the Altersvorsorgedepot decisively shapes the financial structure of your retirement. The payout phase normally begins at retirement age. From the 2027 start date, the legislator gives savers a clear free choice here. While the classic life annuity guarantees a reliable income until the end of your life, the drawdown plan focuses on maximum flexibility, return potential and the inheritability of remaining assets.

The two basic models of the payout phase compared

For savers approaching retirement, once the age threshold is reached, the focus shifts from pure wealth-building to structured withdrawal in retirement. The statutory framework requires providers to schedule payouts under a drawdown plan until at least age 85. As a result, the remaining account balance stays invested in the capital markets throughout retirement. A life annuity, by contrast, transfers the capital into an insurer's collective pool, to fully cover the risk of a very long life.

• Lifelong life annuity: guaranteed monthly pension payment until the end of your life, protection against longevity risk, capital is tied into the collective pool once payments begin (inheritability only possible through an optional guarantee period).
• Fixed-term drawdown plan: flexible monthly instalments running to at least age 85, remaining capital keeps working in the capital markets, assets not yet paid out remain available for your heirs.

Which path is optimal for you depends on your individual health and family situation, your protection needs and other sources of income. Detailed payout options give you the ability to combine both withdrawal models deliberately. In the following sections, we analyse the specific advantages and disadvantages, as well as the tax implications, of both routes for your retirement.

The lifelong life annuity: covering longevity risk

In the Altersvorsorgedepot, the lifelong life annuity provides a secured monthly source of income until the end of your life, effectively protecting retirees against financial longevity risk. Anyone who chooses this payout route transfers their accumulated assets, in full or in part, to a risk carrier that takes on the longevity risk. Below, we analyse the actuarial background, the advantages and disadvantages of collective protection, and the tax consequences during the payout phase.

Collective risk-pooling and actuarial factors

The foundation of the classic life annuity is collective risk-pooling within the insurance company. The capital paid in by all policyholders is pooled: the remaining assets of members who have died stay in the pool and thereby fund the pension payments of those who reach a particularly advanced age. To guarantee payout security over several decades, insurers factor in cautious mortality tables and annuitisation discounts. These safety buffers ensure predictable pension payments, but at the same time result in a lower ongoing payout amount compared with an unbuffered capital withdrawal.

• Lifelong payout guarantee: pension payments continue reliably until the end of your life, regardless of the age you reach.
• Collective risk-pooling: returns and remaining capital are redistributed within the insurance pool to cover high life expectancies.
• Limited inheritability: without a separately agreed guarantee period, unused assets are forfeited to the pool on death.

Deferred taxation in retirement

During the payout phase, income from a life annuity is subject to deferred taxation. That means the monthly pension payments are taxed as taxable income at your personal income tax rate in retirement. Since this rate is often lower in retirement than during your working life, an attractive tax shift results. When deciding on the right payout options, we recommend always assessing the guaranteed life annuity in the overall context of your personal tax and income situation (not investment advice within the meaning of § 1 Abs. 1a Nr. 1a KWG).

The drawdown plan to age 85: maximum flexibility and inheritance

With the reform of subsidised private pension provision, the previous requirement to annuitise for life falls away under the new Altersvorsorgedepot. From the start of the payout, you can choose a fixed-term drawdown plan that allows a highly flexible withdrawal of the capital you've built up. The decisive advantage of this option lies in continuous investment: the remaining capital stays invested in the capital markets throughout the entire withdrawal phase. As a result, you keep benefiting from return potential while drawing agreed monthly instalments. We do point out, however, that return potential always comes with corresponding market risk.

Key criteria of the drawdown plan at a glance

• Minimum term to age 85: the statutory framework requires the drawdown plan to be calculated to run until at least age 85. A longer term can be agreed individually with the provider.
• Withdrawal logic and instalment amount: the size of the monthly withdrawal instalments results from the chosen remaining term, the remaining account balance and the assumed performance.
• Full inheritability: if the account holder dies before the minimum term ends, the remaining assets at that point pass in full to the heirs.

Inheritability marks a key difference from the classic life annuity, where unused capital reverts to the insurance pool on death without a special agreement. Transferring the remaining assets to heirs, however, involves specific tax rules. While a transfer to a spouse is possible tax-neutrally into their own retirement-provision contract, other heirs may have to repay allowances and tax advantages granted. For savers approaching retirement, the drawdown plan therefore offers transparent, self-directed control over the succession of assets. Please note, for all model calculations: the returns and final capital amounts stated are for illustration and do not constitute investment advice within the meaning of § 1 Abs. 1a Nr. 1a KWG.

Inheritability and tax treatment on death, compared directly

The tax and inheritance-law rules that apply on death differ fundamentally between a lifelong life annuity and a fixed-term drawdown plan. While a drawdown plan primarily serves flexibility and the preservation of capital, the classic life annuity is built around the actuarial collective principle. For forward-looking retirement planning, it's essential to look at inheritability and the tax consequences when a payout event occurs.

Retroactive taxation and privileges for spouses

If the account holder dies during the payout phase of a drawdown plan, tax law draws a precise distinction between spouses and other heirs. Surviving spouses benefit from a statutory privilege: they can transfer the remaining retirement-provision assets, without deductions and without a subsidy-detrimental dissolution, directly into their own retirement-provision contract. All state allowances received during the accumulation phase, as well as the tax advantages granted, remain intact in full.

If, however, the remaining balance of a drawdown plan passes to other heirs such as children or third parties, the statutory repayment obligation applies. In that case, all state subsidies, as well as the separately assessed tax savings from the Sonderausgabenabzug (deduction as a special expense), must be repaid to the tax authorities. With a pure life annuity without guarantees, the remaining capital is forfeited to the insurance pool on the policyholder's death, so no repayment is due, but no capital flows to survivors either.

Return and market opportunities during retirement

During the withdrawal phase, the payout form you choose largely determines how your remaining assets develop. A flexible drawdown plan in the Altersvorsorgedepot leaves the capital not currently needed invested in the capital markets, so ETF investments can keep generating returns even in retirement. Insurance companies, by contrast, shift the reserve capital behind a classic life annuity into fixed-income, lower-yielding assets. As a result, the life annuity offers a reliable monthly pension, but largely forgoes later market opportunities. Anyone comparing the different payout options therefore has to weigh return potential against calculable protection.

Staying invested in the capital markets under a drawdown plan offers a chance of effective inflation protection, but carries what's known as sequence-of-returns risk. If share prices fall sharply at the start of your retirement, every monthly payout reduces the remaining substance disproportionately. If fund units are sold during phases of low prices, the account's ability to recover shrinks when markets subsequently rebound. Classic insurance calculations eliminate this sequence-of-returns risk entirely, but demand a noticeable safety discount on the ongoing rate of return in exchange.

For savers approaching retirement, weighing continuous market opportunities against guaranteed stability is a fundamental, individual decision. A drawdown plan is especially suitable when other basic income exists and market fluctuations can be absorbed. A life annuity, by contrast, is advisable where there's a pronounced need for unlimited protection. Note: all model calculations and comparisons serve solely for comparative orientation. Not investment advice within the meaning of § 1 Abs. 1a Nr. 1a KWG.

Combination models and hybrid forms of payout

Beyond the pure basic forms of the lifelong life annuity and the plain drawdown plan, the statutory framework for the Altersvorsorgedepot also opens up flexible combination models. Savers approaching retirement therefore don't have to commit to a rigid either-or choice. The statutory rules allow you to structure the drawdown of capital up to age 85 through a drawdown plan while, at the same time, covering the subsequent longevity risk through a deferred partial annuitisation. We recommend examining these hybrid approaches carefully against your personal retirement-provision structure. Further detail on the payout options shows how flexibility and protection can be combined.

• Drawdown plan to age 85 with subsequent annuitisation: until age 85, you receive regular withdrawals from the subsidised Altersvorsorgedepot. From age 85, a predefined portion of the capital funds a lifelong life annuity.
• Splitting the account balance: you can split your capital at the start of the payout phase. One part secures a lifelong basic income through a pension policy (basic protection), while the remaining part stays in the flexible drawdown plan and can be inherited until the plan ends.
• Switching options and deadlines: the final choice of payout form is fixed just before you enter retirement. Up until the payout phase begins, your options stay adjustable, so you can respond to changed life circumstances.

Splitting the balance offers a decisive advantage for retirement planning: while the lifelong life annuity offers unlimited protection against financial longevity risk, the remaining capital in the drawdown plan stays inheritable in the event of unexpectedly early death. Note, though, that on inheritance, state allowances and tax advantages generally have to be repaid, unless the balance is transferred tax-free to a surviving spouse's retirement-provision contract.

Choosing the optimal hybrid form depends heavily on your state of health, other sources of income such as the statutory pension, and your individual wishes for inheritance. The design options and worked examples shown here serve solely for orientation and information (not investment advice within the meaning of § 1 Abs. 1a Nr. 1a KWG).

Decision criteria for savers approaching retirement

The choice between a lifelong life annuity and a fixed-term drawdown plan for the Altersvorsorgedepot isn't purely a question of return, but requires a criteria-based analysis of your personal life situation. Savers approaching retirement face the challenge of weighing the wish for reliable protection against the need for flexibility over time and estate protection. The law provides that a drawdown plan runs until at least age 85^[1], while a life annuity guarantees a monthly payout until the end of your life.

Checklist of criteria for personal retirement planning

• Statutory and occupational base coverage: if your entitlements from statutory pension insurance and occupational pension provision already fully cover your fixed basic costs in old age, the guarantee function of a life annuity matters less. In this situation, a drawdown plan creates additional financial freedom.
• Health status and longevity risk: if you estimate your life expectancy to be high, or want to offload the financial risk of a very long life entirely, lifelong annuitisation provides the right foundation.
• Estate planning and inheritance wishes: the remaining capital in a drawdown plan stays inheritable on death. For savers who want to pass on assets to children or family members, this option offers substantial advantages over a standard life annuity, where the capital is consumed collectively.
• Other unencumbered assets: if you also hold free capital investments or property in parallel, the Altersvorsorgedepot can be used in a more targeted way to bridge specific phases of retirement.

Tax details play a key role especially in questions of inheritability on death: while balances in a drawdown plan can be transferred to a spouse without any deduction of subsidies on inheritance, passing them to other people triggers repayment of the state allowances and tax advantages. We advise weighing these criteria together as a whole, to determine the optimal mix for your retirement.

A neutral decision compass: which model suits you?

The optimal decision between a lifelong life annuity and a fixed-term drawdown plan depends on your individual need for protection, your state of health and your family goals. The state-subsidised Altersvorsorgedepot gives savers approaching retirement, for the first time, the freedom to structure their retirement flexibly. While the life annuity guarantees income protection with no time limit, the drawdown plan scores through preserving capital and the statutory inheritability to family members.

For putting this into practice, our knowledge section offers you two equally valid routes. Self-deciders can use the digital subsidy calculator to work through different withdrawal scenarios, subsidy rates and payout phases independently. If, instead, you're looking for direct exchange with professionals, the independent advice service puts you in touch with qualified financial-efficiency experts. Our guides offer an overview of the legal framework, as well as guidance on balancing personal advice and digital tools.

Which option benefits you most depends largely on your existing pension gap and other types of income such as the statutory pension. A structured comparison helps you match the retirement phase precisely to your life situation. (Note: all calculations, projections and model comparisons serve solely for general orientation and do not constitute investment advice within the meaning of § 1 Abs. 1a Nr. 1a KWG.)