HomeFixed Term Annuities provide a guaranteed level of income for a specific term. At the end of the term a Guaranteed Maturity Amount (GMA) is provided, with which a further Fixed Term Annuity can be purchased. Alternatively, other options such as conventional Lifetime Annuity, Investment Linked Annuity or Income Drawdown could also be used. The income is taxed as earned income.
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This approach provides flexibility and enables people retiring to enjoy certainty with regard to their income payments, as they would with a Lifetime Annuity, but only for the term selected, rather than throughout life.
The Fixed Term Annuity provides future flexibility by offering the ability to change the amount and shape of income at agreed intervals in retirement.
There is no minimum level of income that needs to be taken, which means that if required you can take the tax-free cash alone and defer income to a later time.
A Fixed Term Annuity can be free of investment risk. The income payments are guaranteed, as well as the GMA available at the end of the term, which is known at the outset of the arrangement.
Value protection
As previously outlined under the Lifetime Annuities section, Value Protection means that if you die before the total income payments received are at least equal to the original purchase price, the difference will be returned less a 55% tax charge. If the money is reinvested in another pension income product, instead of taking the lump sum, the tax charge does not apply.
Spouse’s / partner’s pension
Again, as with a Lifetime Annuity, if you are married, in a civil partnership or have a financially dependent partner, the Fixed Term Annuity can be set up to continue paying them an income after you have died. This can be at the full rate, or at a reduced level, for example two thirds or a half. However, this continuing income is only payable for the remainder of the fixed term, with the GMA then being available for reinvestment by the surviving spouse / partner at the same selected percentage level of the income. For example, if you select a 50% Spouse’s Pension, he or she would receive 50% of the GMA.
Including a guaranteed period
It is possible to structure a Fixed Term Annuity to ensure the income will be paid for a specified number of years from the start of the contract, even if the investor dies in the early years. However, it is important to note that the guarantee period starts at the beginning of the fixed term, not from the date of death.
Selecting the appropriate structure for death benefits should be handled in conjunction with a professional retirement adviser.
Contract reviews
Fixed Term Annuities currently require a review of the maximum income levels every three years if you are aged under 75 and annually if you are older than 75.
If a plan term is fixed for longer than three years, a review of the maximum income is still required, which may cause a reduction in the level of income that can be paid, particularly if the maximum permitted income levels were selected from outset. These limits are set by the Government Actuary’s Department (GAD). However, whilst this could happen, it is not common because as you become older, GAD rates improve and Annuity rates are already at a historical low.
With some contracts, any income that cannot be paid because of the limit will be added to the maturity value of your plan to increase the GMA, thereby ensuring that its value is not lost.
Future advice
Financial advice will be required at the end of the fixed term to ensure that the most appropriate income structure at that time is selected. Meeting the cost of this advice should be factored into your calculations and decision making process.
Exit strategies
Fixed Term Annuity contracts expire at the end of the agreed term and offer the investor the opportunity to review and select the most appropriate income structure and ongoing retirement income option at the time. With some products, it is not possible to exit the contract during the fixed term, whereas others allow you to purchase an enhanced Lifetime Annuity should you be eligible during the fixed term.
Advantages of a fixed term annuity
- You have immediate access to some or all of the tax-free cash available
- You can choose to take just the tax-free cash and no income
- There is no exposure to investment risk
- Your income is guaranteed for the fixed term of the annuity, provided it remains within GAD limits
- The plan will also provide a Guaranteed Maturity Amount (GMA), known from the outset
- At the end of the fixed term, you can use the GMA to purchase any allowable form of pension income product suitable for you at that time. As such it provides considerable flexibility
- You may be eligible for an Enhanced Annuity if your health has worsened in the period between establishing the Fixed Term Annuity and the maturity date of the plan. This may lead to a significantly higher income
- The Value Protection death benefit, if selected, ensures that your spouse or partner and/or dependants, or estate, receive the full value of the original purchase price of the annuity, less the value of any income payments actually paid. This benefit will be subject to a 55% tax charge unless reinvested in another appropriate pension product for the beneficiary
- You can choose for a surviving spouse’s / dependant’s pension to carry on being paid after your death, which will also enable him or her to receive the appropriate level of GMA. For example, if you select a 50% Spouse’s pension, he or she will receive 50% of the GMA.
Disadvantages of a fixed term annuity
- Your pension options are fixed for the term selected, and cannot be altered to take account of changes in personal circumstances during the fixed term
- The pension you receive is dependent upon Annuity rates at the time of purchase, which are currently low when compared to historical rates
- Whilst the GMA is guaranteed, the actual amount of income in the future will be dependent upon the prevailing Annuity rates at the time. Your future income may be lower or higher than the current level of income
- The maximum income you can take through a Fixed Term Annuity is restricted by GAD rates. It is therefore possible that your income level may have to be restricted at the review dates. There is a greater chance of this happening if you choose to take a high income
- Unless you include inflation proofing, you are exposed to the risk of inflation eroding the value of your income during the contract term
- At the end of the fixed term, you may need advice which is likely to incur a cost
Next steps
Our team of Independent Financial Advisers in are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
Further Information
Options
Lifetime Annuity
Investment Linked Annuity
Fixed Term Annuities
Income Drawdown
Phased Retirement
Steps to consider leading up to retirement
