Our advisers can help you make the right decisions

Bev Stoves & Sarah McCarthy, Independent Financial Advisers, Investment Sense

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0115 933 8433

info@investmentsense.co.uk

Fixed 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.

This approach provides flexibility and enables you to enjoy certainty regarding your income payments, as you would with a Lifetime Annuity, but only for the term selected, rather than throughout your life.

The Fixed Term Annuity provides future flexibility by offering the ability to change the amount and shape of income at agreed intervals.

There is no minimum or maximum level of income which needs to be taken, meaning 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.

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.

We would recommend selecting the appropriate structure for death benefits should be handled in conjunction with a professional retirement adviser.

Exit strategies

Fixed Term Annuity contracts expire at the end of the agreed term. At that point, you have 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 become eligible during the fixed term.

Advantages of a Fixed Term Annuity

  • You have immediate access to some or all 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
  • The Guaranteed Maturity Amount (GMA) is 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, providing considerable flexibility
  • You may be eligible for an Enhanced Annuity if your health has worsened in the period between buying 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; tax is only payable if you die after the age of 75
  • Income payments can be guaranteed for a certain period so they will continue to be paid for the remainder of the fixed period after your death. However, this cannot be used in conjunction with Value Protection
  • 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
  • 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

Where next?

Pensions Freedom – A summary of the key changes
Pensions Freedom – Key questions answered
Key considerations
Retirement options
Delay taking your pension
Annuity
Investment Linked Annuity
Flexi-Access Drawdown
Uncrystallised Funds Pension Lump Sum (UFPLS)
Full Encashment
Purchased Life Annuities
8 Steps to take leading up to retirement