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Fixed Term Annuity

Written by Retirement Line

 Page last updated: 12th December 2024

A guaranteed annuity income for a set term, while keeping your options open

A fixed term annuity lets you take a guaranteed income from your private pension savings, with options available to you when the term ends. For instance, you may have the opportunity to buy another annuity, or take your remaining pension savings as a cash lump sum, subject to tax.

Everyone’s situation is unique of course, but you may welcome the flexibility of a fixed term annuity, as opposed to one that commits you to taking an income for the rest of your life.

In this guide to fixed term annuities, we take a look at how they work and the reasons you might choose one. You can also use our free fixed term annuity calculator to find out how much income you could secure - or call us on 0800 652 1316 or request a call back to talk through your options with one of our Annuity Specialists.

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Use our free annuity calculator

What is an annuity?

An annuity is a financial product that provides a guaranteed income for your later years. You use some or all of your ‘defined contribution’ pension savings to purchase an annuity from your chosen provider. In return, you receive regular guaranteed payments, unaffected by investment returns or market performance.

The amount of income you get from your annuity depends on factors including the size of your pension pot, your age and current UK annuity rates.

A lifetime annuity provides income for the rest of your life. In contrast, a fixed-term annuity pays income for a specific number of years. 

How does a fixed-term annuity work?

If you don’t wish to commit to a lifetime annuity, you can instead choose a fixed term annuity. UK providers also call these products ‘fixed term retirement plans’, ‘fixed term income plans’ or ‘guaranteed fixed-term income plans’ depending on the provider. 

Whatever their name, these annuities offer more flexibility than a lifetime annuity and may keep your options open in the future.

As with other types of annuities, you can take up to 25% of your pension savings as a tax-free lump sum. You can use the remaining fund to provide a guaranteed income unaffected by interest rate or market changes. 

Having the reassurance of a guaranteed income may be attractive to you. However, just bear in mind that you wouldn’t benefit from increases in interest rates, annuity rates or investment markets during the fixed term.

Other fixed-term annuity options

A fixed term annuity offers the following additional options: 

  • You can take a single life annuity, or a joint life annuity that will continue to pay your spouse when you pass away.
  • There are in-built death benefits with a choice of options.
  • You can take income on a level basis throughout the term, or rising at a fixed percentage or in line with the Retail Price Index each year.
  • The term can be between one and 25 years, although most people in our experience choose a term of 5-10 years.
  • You can be paid on a monthly, quarterly, half-yearly or annual basis. 

There are several UK annuity providers who offer fixed term annuities. At Retirement Line, our Annuity Specialists search on your behalf to find the best products and fixed term annuity rates UK providers can offer to fit your circumstances and needs.

David Green

Why might I choose a fixed term annuity?

Thanks to the flexibility of fixed term annuities compared to lifetime annuities, there are several reasons why this option might meet your needs. Below are three of the most common reasons that we find people are using fixed-term annuities in the UK. 

We have provided an illustrative example for each scenario. These are based on quotes for someone living in Peterborough (postcode PE7 8JG) from the leading annuity providers generated by Retirement Line’s in-house annuity quote system on 03/12/24.

1- Accessing maximum income with a fixed-term annuity

One reason for arranging a fixed-term annuity is to maximise income over a set period of time. This approach allows you to "strip out" your pension fund over a period of 1 to 25 years, with 5 to 10 years typically being most popular in our experience. 

By exhausting the fund in this way, you can potentially receive a higher annual income compared to a lifetime annuity. However, depending on how long you live, you may receive more income in total from a lifetime annuity.

Why choose this option?

Let’s say you are set to receive retirement income in the future, such as from a defined benefit (DB) pension or the State Pension. A fixed term annuity would supplement your income in the period before your other retirement income sources kick in.

Another potential scenario is where you have multiple pension pots. You might choose to strip out one fund over a fixed term, while preserving the others for later use.

Stripping out also has a potential tax advantage. Instead of taking an entire pension pot as a lump sum, which could push you into a higher tax bracket, you can stagger withdrawals over several years with a fixed term annuity. This might help keep your annual income below the next tax threshold, reducing the overall amount of tax you pay.

Please bear in mind that this option will leave you with no income or lump sum at the end of the term. You will need to rely on other sources of income once your annuity payments stop.

Example - William, age 67

Pension fund: £100,000 after taking his tax-free cash allowance. 

Desired outcome: to generate maximum income over a 15-year period.

William wants to maximise income in the first 15 years of retirement. He likes to travel, and anticipates slowing down and travelling less as he moves into his eighties.

He chooses a 15-year fixed term annuity with no guaranteed maturity amount (GMA). This would provide him with a guaranteed annual income that ends at age 82. During this period, he would receive £9,179.52 per year (based on December 2024 rates). 

William knows that exhausting his pension fund over a fixed term means his income will stop at the end of the period. However, he has lifetime income from other sources in place so will receive sufficient income after the fixed term annuity runs out at age 82.

2 - Income plus a guaranteed maturity amount (GMA)

This is similar to our first scenario above, but with the addition of a lump sum known as a guaranteed maturity amount (GMA) at the end of the fixed term. 

With this option, you use some of your pension fund to generate income, and the rest to grow through investment to deliver your GMA. But unlike other investments, the growth is guaranteed and is not subject to ups and downs.

When the fixed term ends, you’ll have various options for using your GMA, including taking some or all of it as cash subject to income tax. Other options include purchasing another annuity or investing in a drawdown scheme. Bear in mind, however, that annuity rates, interest rates and other economic conditions at the end of the term are unknown, so there is some element of risk with this option.

Why choose this option?

One scenario where this option may be suitable is if you wish to bridge an income gap, such as in the years before the State Pension or other pensions start to pay you an income. The GMA feature means you can be certain of a lump sum at the end of the annuity term.

Example - Rosa, aged 62

Pension fund: £80,000 after taking her 25% tax-free lump sum allowance. 

Desired outcome: to secure income for five years, with a lump sum guaranteed in the future.

Rosa plans to fully retire at 67, and wishes to reduce her working hours in the five years beforehand. She needs £5,000 per year on top of her wages to maintain her standard of living when she switches to part-time work. 

Rosa uses her £80,000 to buy a five-year annuity. She takes an income of £5,000 a year, which totals £25,000. At the end of the five years she receives a lump sum £72,720. This means she sees a total return of £97,720 from her £80,000.

Rosa feels this gives her the best of both worlds. First, steady income during her semi-retirement. But also, she will have a lump sum available when she fully retires, and will be free to choose how she uses that money in the years ahead.

3 - Take no income for now, but access your tax-free cash allowance and set up a guaranteed maturity amount (GMA) for the future 

A third scenario is to use a fixed-term annuity as a way to access your 25% tax-free cash allowance, while securing a guaranteed return on the remaining 75% of your pension pot. 

Why choose this option?

This option may be suitable if you don’t need an income from your pension pot at the moment, but want to unlock your tax-free cash without taking investment risks with your remaining pension savings.

With a fixed term annuity, your money grows at a guaranteed rate, giving you certainty about its value at the end of the term. Unlike income drawdown for example, there is no investment risk, making it potentially a good choice for those who prefer stability.

Example: Jacob 62

Pension fund: £150,000 after taking his tax-free cash allowance.

Desired outcome: access his tax-free cash and keep his options open for the future.

Jacob’s immediate need is to pay off his mortgage, so he takes £50,000 tax-free from his £200,000 pension pot to do this.

As he is still in work, he does not need any income from his pension savings yet. That’s why he uses the remaining £150,000 to buy a fixed-term annuity with zero income. 

This will give him a guaranteed maturity amount of around £178,400 at age 66 (based on December 2024 rates). That adds up to a return of £28,400 from his four-year annuity. 

This approach lets Jacob access his tax-free cash allowance now, without committing to a long term retirement income option. At age 66, he will be able to revisit his finances and choose how best to use the GMA.

These are just some examples of how a fixed term annuity may meet your needs. Your situation will of course be unique, so please contact us and one of our Annuity Specialists will be happy to explain your options in more detail.
 

What happens at the end of the term?

If you take up the guaranteed maturity amount (GMA) option, at the end of the term you accrue a lump sum that you can use in several ways. You might choose to buy a further fixed term annuity, a conventional lifetime annuity, or an enhanced lifetime annuity if your health has deteriorated. You are also able to take this fund as cash, subject to tax, or transfer it into drawdown.

As you can see, choosing a fixed term annuity with a GMA gives you flexibility for your future retirement income planning. However, your GMA may not be sufficient to meet your income requirements throughout the rest of your retirement. Our Annuity Specialists can provide you with quotes from leading providers that will show you the level of income and GMA you can generate from your pension savings.

How much income will I receive with a fixed term annuity?

The amount of income you receive from a fixed term annuity will depend upon several factors. These include the size of your pension fund and the plan you choose. 

The fixed term annuity rate your annuity provider offers also affects the amount of regular income you’ll receive. The difference between the lowest and highest fixed term annuity rate available can be surprisingly large. Your current pension scheme or the provider they refer you to may not even offer a fixed term annuity as an option. 

Your income will also depend on whether you choose a level or escalating annuity. A level annuity pays you the same annuity income each year. An escalating annuity pays less initially, but then rises each year at a fixed rate or in line with inflation. 

For an idea of how much annuity income you might receive, try our free fixed term annuity calculator. Alternatively, get in touch with our team of Annuity Specialists today on 0800 652 1316 or request a call back. They’ll be able to provide you with free, no-obligation annuity quotes from the UK’s leading annuity providers.

Can a fixed term annuity reduce my tax burden?

As with other annuity products, you have the option to release up to 25% of your pension fund as a tax-free cash lump sum at the outset of your annuity. Any amount above 25% will be treated as taxable income in line with UK tax laws.

If you find that taking a lump sum in excess of your 25% tax-free cash allowance will subject you to the higher/additional rate (40% or 45% in tax year 2024/25), there is an alternative. You could instead take your tax-free cash and use a fixed term annuity to potentially reduce the tax payable. 

This would typically involve taking all the 75% balance as a regular income over several tax years with your annuity. This could potentially mean that you pay tax on your annuity income at a lower rate than you would by taking it as a single lump sum.

Any death benefits taken will be paid tax-free to your nominated beneficiary if you pass away before the age of 75, but treated as their taxable income if you pass away aged 75 or over.

Update – October 2024 Autumn Budget: 

In the Budget of 30 October 2024, the government announced that pension savings will be considered part of someone’s estate and liable to inheritance tax (IHT) from April 2027. This will be within existing IHT rules: IHT is not payable by a person’s spouse or civil partner, and is only typically payable on estates over relevant IHT thresholds.

Another aspect of inherited pensions is income tax. Currently, if you pass away before age 75 any pension funds or annuity income your beneficiaries receive is free of income tax, whereas they are liable for income tax at their marginal rate if you die after age 75. Retirement Line’s understanding is that beneficiaries may still be liable for income tax on inherited pension income from April 2027, although it isn’t clear whether the ‘age 75’ rule will remain.

More information will be available following a government consultation period that will run until early 2025. We are monitoring this issue and will report on it once the matter is clarified. Please see our Budget report for more information: Budget 2024 – pensions brought into inheritance tax from 2027.

What happens if I pass away during the fixed term?

Fixed term annuities generally include in-built death benefits. These act as a kind of insurance policy for your loved ones should you pass away during the term of your annuity. 

For example, a joint life fixed term annuity continues to pay your beneficiary an income for the remainder of your annuity term should you pass away before your plan ends. If you’ve chosen to receive a Guaranteed Maturity Amount, this will also be paid to your beneficiary at the end of the fixed term. 

You don’t need to have a spouse to qualify for a joint life annuity. You can normally take out a joint plan with any financial dependent aged 40+.

Some providers offer other forms of death benefit and our Annuity Specialists can talk through your options with you. Simply call our team today on 0800 652 1316 or request a callback. Our Annuity Specialists can provide quotes from fixed term annuity providers and a comparison of different death benefit options.

Does a fixed term annuity take my health into account?

A fixed term annuity may be an attractive retirement income option. But it doesn’t offer enhanced rates and the potential of a higher income should you have a qualifying health condition.

Due to the potential for more income with an enhanced lifetime annuity, it’s important to find out whether you qualify. Even lifestyle choices such as smoking could mean you get more income.

If you are currently in good health, a fixed term annuity will give you the opportunity to apply for an enhanced annuity at the end of your chosen term should your health deteriorate. 

You can read more in our guide to enhanced annuities. Alternatively, you can call us on 0800 652 1316 or request a callback. One of our Annuity Specialists will be happy to explain further and check your eligibility. 

Do I have to purchase an annuity through my current pension scheme or provider?

When you become eligible to turn your pension pot into an annuity, your current pension scheme might offer you an annuity plan - but you don’t have to accept their offer.

It’s unlikely that this plan will provide the highest level of income your pension fund could generate. In fact, the Financial Conduct Authority reported in 2016 that ‘80% of people who purchased an annuity via their pension provider could have received a better deal from another provider’. 

More recently, in September 2024 a report from retirement specialists Just Group confirmed that the gap between the best and worst annuity rates is still an issue. They say a healthy 75-year old could get up to 20% more income by shopping around, and 13% more at age 65. The gap could be even higher for people who qualify for an enhanced annuity on grounds of poor health or certain lifestyle factors.

We therefore suggest using your ‘Open Market Option’. This means asking leading annuity providers to show the level of retirement income they would give you in exchange for your fund.

This can prove time consuming. In fact, many providers won’t deal with you directly. You may therefore prefer to ask an intermediary such as Retirement Line to do it for you.

If you receive an annuity quotation from your pension scheme, we can compare this against quotes from the UK's leading annuity and fixed term annuity providers. You’ll then know you’re getting the best deal and the highest retirement income. 

This is all done without obligation to proceed. If we arrange an annuity for you, we will be paid a commission from the provider, which is taken into account when calculating their annuity rate.

We are so confident we can secure you the highest income that we even have a Best Quote Guarantee. If you receive a better annuity quotation on a like for like basis directly from another broker or provider, we'll send you a £250 M&S gift voucher¹.

Which providers offer fixed term annuities?

Not all annuity providers offer fixed-term annuities, but several do. Here are the providers and the name of their fixed-term annuity UK products:

  • Legal & General: Fixed Term Retirement Plan

  • LV=: Protected Retirement Plan

  • Standard Life: Guaranteed Fixed-term Income Plan

  • Canada Life: Fixed Term Income Plan

These providers offer a range of options to suit different needs and preferences. Our Annuity Specialists can check them all on your behalf to help you find the best product for your circumstances.

 

What are the benefits and risks of a fixed term annuity?

As with all big financial decisions, choosing to take out a fixed term annuity involves certain risks as well as benefits: 

Risks of a fixed term annuity:

  • The income from your Guaranteed Maturity Amount (GMA) may be lower at the end of the term than that available from a conventional annuity today. 
  • If you are interested in buying another annuity when the term expires, rates might be lower.
  • Inflation will reduce the value of your future income.
  • You won’t have the opportunity to participate in future investment returns, unlike some alternative retirement income options. 
  • Withdrawing all your savings might leave you with inadequate future income.
  • You need to be sure of the tax payable on your withdrawals.
  • Taking an income could result in a reduction of your annual allowance for making pension contributions.

Benefits of a fixed term annuity:

  • Regular income for a fixed term enables you to budget accurately or withdraw the whole fund during the selected term, potentially more tax efficiently.
  • A Guaranteed Maturity Amount (GMA) without investment risk.
  • Flexibility by allowing a change of options if your future circumstances change.
  • Potential for higher income at the end of the term if your health has deteriorated or if future annuity rates increase.
  • Option of taking tax-free cash without taking any income.
  • Choice of cost-effective lump sum death benefits.
  • Legal & General and LV= only: option to transfer out at any time for any reason. For example, if you were to suffer from ill health and then qualify for an enhanced annuity.

Speak to an Annuity Specialist today

At Retirement Line, we pride ourselves on providing a jargon-free and impartial annuity service. Our expert Annuity Specialists can provide you with a comparison of the best fixed term annuity rates from the UK’s leading annuity providers.

You could also benefit from preferential annuity rates we secure due to our position as the UK's largest pension annuity broker* and our close relationships with UK fixed term annuity providers. 

For a free, no-obligation annuity quote, try our free fixed term annuity calculator. If you’d prefer to speak with an Annuity Specialist directly, you can call us on 0800 652 1316 or email us at info@retirementline.co.uk

Frequently Asked Questions

Can I change the terms of my fixed-term annuity once it’s set up?

The features of a fixed-term annuity are typically fixed at the start and cannot be altered during the term. This includes the length of the term, the income level and the rate of return. This ensures you have certainty over both your income during the term and the guaranteed maturity amount at the end, if chosen.

However, some providers do let you end your annuity early for extra flexibility. With this option, you can access a lump sum on termination of the annuity - but this may be less than the size of the fund you originally used to buy your annuity. 

How is the guaranteed maturity amount calculated?

The GMA is calculated based on the guaranteed rate of return agreed upon when you purchase the annuity. Key factors include the term length, the income you decide to take (if any), and fixed-term annuity rates in the UK at the time of setup. 

Generally, the less income you take during the term, the higher the GMA will be at the end. Your annuity provider will confirm the exact GMA upfront, giving you clarity and security for future planning.

Can I take no income and let my entire fund grow?

Yes, you can choose to take zero income during the term of a fixed-term annuity. UK savers can benefit from the full value of their pension pot (minus any tax-free cash taken) growing at a guaranteed rate, which is specified at the start. 

This option might be suitable for those who don’t need income from their pension savings immediately, but who want to guarantee growth on the remaining fund. 

By letting the entire fund grow without withdrawals, you can secure the largest possible maturity amount for future use. This is unlike a drawdown scheme, where your fund value can go down as well as up as it is exposed to market fluctuations.

 

 

 

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