What Is A Fixed Term Annuity?
Fixed Term Annuities launched in the UK five years ago are pretty self-explanatory, they operate like a standard annuity, paying a guaranteed annual income (which could be level or indexed and/or include a spouses pension) in return for a lump sum. However with a fixed term annuity the income is only paid for an agreed fixed term and not for the rest of your life as with a standard annuity. At the end of the fixed term your income will stop and you will receive a proportion of your lump sum back (the amount you will get back is guaranteed and agreed at outset) which can then be used to purchase another form of retirement income.
So why may you consider a fixed term as opposed to a lifetime annuity?
Fixed term annuities allow you to keep control of your pension rather than locking into rate for life, so in theory that you may be able to secure a higher income in 10 or 15 years when you come to purchase another form of retirement income. Your income could be increased due to changes in circumstances over the fixed period, for example if:
• Annuity rates increase
• Your health deteriorates allowing your to qualify for an enhanced annuity
• Your spouse dies which would mean your next annuity purchased would be on a single life basis as opposed to joint life which again may enhance the income you receive.
The other pro is that under a fixed term annuity the benefits on death, net of inheritance tax, can pass to beneficiaries which is not the case with standard annuities.
But there are obviously downsides and disadvantages to not locking into a guaranteed income for life. The main one being that you are gambling that annuity rates will improve and you will be able to increase your retirement income at the end of your fixed term. If rates continue to fall you could see a reduction in the income you receive when you come to purchase your next source of retirement income.
As with all financial decisions it is critical that you get financial advice to ensure that you are making the right decisions in line with your circumstances.