What are fixed term annuities?

It’s estimated after the new pension reforms, retirees opting for annuities could reduce by up to 75%.

One of the reasons for this reduction is because retirees were often locked with a low annuity rate which they could not change later.

If you are one of the few who do not wish to commit to a lifetime annuity, then a fixed term annuity might be worth considering.

A fixed term annuity aims to provide the best of both worlds, a guaranteed annuity income and the flexibility of a drawdown later.

How it works

In a fixed term annuity, you will receive a guaranteed income for a fixed period which can be between three and twenty-five years. You can choose the amount of income that you wish to receive during this term.

At the end of the term period of the annuity, you will receive a lump sum of money called ‘Maturity Amount’, which can either be paid directly to you or can be invested in a second retirement income product depending on your financial situation then or your health status.

The Benefits 

One of the most important factors that differentiate a fixed term annuity from other types of annuities is that you do not have to commit to features like widows pension or death benefits at the outset for the rest of your lifetime.

Your personal or financial requirements can change at any time, and hence, any choices that you make will only be applicable for the term of the annuity.

At the end of the term, you can reassess your finances and then make an apt decision.

Here are some of the benefits of a fixed term annuity.

  • You can set the level of income you wish to receive from the plan (within government limits). If you opt for a higher income, then the maturity amount you receive at the end of the term will reduce.
  • If you consider that a drawdown is too risky but are not ready to lock-in your pension pot for life, then this is a great option to receive a fixed income for a specified number of years.
  • You have the flexibility to choose a single annuity, a joint annuity or a fixed income or an investment-linked income.
  • At the end of the term, the annuity rates may be higher which may allow you to receive a higher income.
  • Your health condition may not be the same after a decade. You may then qualify for an enhanced annuity which will give you a higher monthly income.
  • In the event of your death before the term is complete, a nominee (dependent spouse or civil partner) or your estate will continue to receive the full monthly income at the agreed rate and will also receive the maturity amount at the end of the term.

What’s the catch?

As is the case with all pension schemes, a fixed annuity plan may not be the right one for you in all circumstances.

  • To receive the full maturity amount, you must keep the plan for the entire term agreed at the outset. If you change your mind midway or have a sudden urgency for funds, and decide to cash in, then you may lose the funds.
  • The income will not change for the entire plan term. If your financial circumstances change, it may not be enough.
  • The annuity rates may fall by the time your plan term ends. If you chose to receive a higher income during the term, the maturity amount you receive would be lower. Subsequently, it may not be enough to buy the same retirement income in the years to come.
  • If your health deteriorates midway of the fixed term, you risk losing out on the maturity amount if you cash in. So, despite being eligible for an enhanced annuity, you will have to continue with the fixed term annuity.

Is it the right choice for me?

Retirees now have more flexibility in the way they use their pension pot. Speak to an independent financial advisor to understand your options and what’s the best choice for your retirement.

If you are looking for a professional financial advisor, you can read our article, ‘How to Select a Financial Advisor’ for more information.