30 April 2024

What is a fixed term annuity?

A fixed term annuity is a retirement product that pays a guaranteed income for a set period of time. If you’re looking for a guaranteed income but don’t want to make a lifelong commitment with your pension savings, then a fixed term annuity could be for you.

It’s a fixed term plan, which means that you can set it up to run for a while then stop. That can be anything from 3 to 25 years. While it’s running it’ll make guaranteed regular payments to you, and you can choose to receive a lump sum at the end of it. Or you can decide not to take an income, and just receive the lump sum at the end. 

Fixed term annuities can help you bridge an income gap while keeping your future financial planning options open. For example, you might have a few years before your State Pension kicks in or want to work fewer hours without losing money.

You’ll also have the peace of mind of knowing that, no matter how the markets do, the amount you get paid won’t change. And when your plan ends it might pay out a lump sum, which you can put toward your next annuity or anything else you fancy.

How do I buy a fixed term annuity?

You can only buy fixed term annuities with money from your pension pot. You can do this by:

  • comparing the market and finding one for yourself
  • getting advice from and going through a financial adviser

To find out more, read our guide to buying an annuity.

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What are my options with a fixed term annuity?

As with any big purchase, it’s worth starting with your goals and needs, then looking round to see which provider and product best meets them. If you’re not sure of them, it might be worth:

  • setting up a free appointment with Pension Wise
  • finding an independent financial adviser at Unbiased (you’ll probably have to pay for their advice).

And at a more basic level, it’s always worth shopping around to get the best fixed term annuity rates.

Once you’ve found the right fixed term annuity, you’ll still have several choices to make. That starts with the basics:

  • how long it should run for, which can be anything from three years to 25 years, if you’re buying directly from the provider and not through an adviser
  • when it pays out, which can usually be monthly, quarterly, twice a year or annually

You’ll probably also have a range of product options to choose from.

For example, you might want to take care of a loved one if you die during the plan’s life. So you could ask for some or all of your payments to be switched to them. You’ll also need to think through what happens when your plan ends. Your plan might be able to pay you a set amount when it ends.

What happens at the end of a fixed term annuity?

When your fixed term annuity ends, it stops paying out. If you opted for a payment at this point, you’ll need to choose what to do with it. You can:

  • take out another fixed term annuity or a lifetime annuity
  • take it as a single lump sum
  • move it into drawdown, ready for you to take some or all of it whenever you want to

When you’re thinking about what to do with your lump sum you should seek guidance or advice, just like you did when you first set up the annuity.

Annuity vs Drawdown – what’s the difference?

It can be hard to know where to start when it comes to thinking about your retirement income. Learn about these two popular ways to access the money in your pension.

What are the fixed term annuity rates?

While lifetime annuity rates take into account your age, lifestyle and even your postcode, fixed term annuity rates don’t. The exact fixed term annuity rate you’ll get will depend on how long you choose your annuity plan to be, how much you’re putting into the lump sum payment and the death benefit options you would like.

Is a fixed term annuity a good idea?

There’s no right or wrong way to access your retirement income. The best choice for you depends on many different factors.

For example, if you’re living with a health condition it might be better to go with an enhanced annuity, which could offer a higher rate of income. But if you just want to bridge an income gap before your State Pension kicks in, a fixed term annuity could be a very helpful choice.

It’s really important to have a good understanding of those factors before you make a decision. Again, if you’re not sure about them, it could be worth getting some free guidance from Pension Wise, a free and impartial service from MoneyHelper. Or you can find a financial adviser at Unbiased.

And finally, you can:

  • find out more about our own fixed term annuity on our annuities page
  • see how much you could get from a fixed term or other kinds of annuity with our annuity calculator

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