A fixed term annuity is a retirement option that offers a guaranteed income for a fixed period of time, providing you with a maturity at the end of the term.
This maturity will usually be calculated at the start of your fixed term annuity plan, and can be used to purchase a lifetime annuity, another fixed term annuity or any other retirement product of your choice.
Fixed term annuities work very similarly to lifetime annuities, providing a guaranteed regular income in return for a portion of your pension pot. The difference is that you can determine an end-point, which could be anything from 12 months to 20 years. At the end of this term you will receive a pre-agreed maturity amount, which you can spend as you wish. Most customers use this maturity amount to buy another annuity or pursue another retirement income option.
As with a lifetime annuity, the level of income you receive from a fixed term annuity will depend on factors such as your health, the size of your pension pot and the terms of your agreement.
Fixed term annuities are a good short-term solution for customers who need to draw an income from their pension savings, but don’t want to commit to a lifetime annuity. In the wake of the recently announced pension reforms, many people approaching retirement may wish to choose a short-term plan so that they can afford to delay a more permanent decision until the retirement landscape starts to look clearer
Delaying making a long-term decision can also leave room to react to any changes to your circumstances that may occur during the term of your fixed annuity. For example, many annuity rates are determined based on your age, health and wellbeing, so you may also be able to claim more attractive rates for your next annuity purchase if your health deteriorates.
Annuity rates can fluctuate considerably over time in line with the economy. If they fall during your fixed-term period, the maturity fund you receive at the end may not be worth enough to guarantee a comfortable retirement income.
Once you take out a fixed-term annuity, you are unlikely to be able to change your level of income until the end of the plan – which may make you vulnerable to inflation or unexpected costs during longer agreements.
In the wake of the pension reforms announced in March 2014, many new short-term annuity products are entering the market, and the rates and terms they offer can vary considerably. An independent financial advisor can offer the most up-to-date rates and recommendations, based on a careful analysis of the whole market based on your stated needs and priorities. They can also offer frank, unbiased advice about whether a fixed-term annuity is the best option for you, and help you to explore any alternatives that might represent better value.
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