Written by the Retirement Line Team
Last Updated: 1st December 2023
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.
If you don’t wish to commit to a lifetime annuity, you can instead choose a fixed term annuity. This is a more flexible annuity that lets you keep your options open for 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 in the future.
Another option is to take some of the fund as guaranteed income and leave the rest untouched. This remaining fund will grow at a guaranteed rate, in line with the fixed term annuity rate you secure when taking out your annuity. At the end of the fixed term, you will have accrued a Guaranteed Maturity Amount (GMA). The less income you take over the fixed term, the larger the GMA will be.
There is also the option of taking zero income. You would just take your tax-free cash to leave the balance of your fund to grow at the guaranteed rate. This would generate the maximum GMA available.
At the end of the fixed term, you have options for putting the GMA to use. For example, you can use it to buy another fixed term annuity or a lifetime annuity, or invest it in a drawdown scheme. You might even choose to take some or all of it in cash, though it will be treated as taxable income in line with UK tax laws.
A fixed term annuity offers the following additional options:
A number of UK annuity providers 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.
Thanks to the flexibility of fixed term annuities compared to lifetime annuities, there are several reasons why this option might meet your needs:
Rather than commit to a lifetime annuity with little flexibility for the future, a fixed term annuity will enable you to review your retirement income arrangements later on as your circumstances change.
Leaving some or all of your pension savings within a fixed term annuity with a GMA brings certainty about how much will be available at the end of the fixed term. This makes it a potential alternative to investing your pension savings into an income drawdown arrangement, with these advantages:
Of course, a drawdown arrangement offers certain advantages over an annuity. We therefore encourage you to carefully consider both alternatives before deciding which works best for you.
Some fixed term annuity providers will let you take withdrawals during the annuity term in addition to any income you receive, or opt out of the plan. For example, Legal and General’s ‘Fixed Term Retirement Plan’ lets you take up to three withdrawals from the plan. This is subject to certain criteria, admin costs, and terms and conditions. The GMA will be recalculated each time to reflect the fact that you have made a withdrawal.
You may choose a fixed term annuity to bridge a gap in your income. For example, if you are 60 and know that the State Pension or a final salary pension will be available in a few years, you could use a fixed term annuity for guaranteed income in the meantime. This could enable you to retire or reduce your work hours now, with the annuity topping up your income until other pensions begin.
Another reason you may choose a fixed term annuity concerns tax efficiency. By taking your pension fund as income over a few tax years instead of as a single lump sum, you may potentially pay less tax. You can read more about this under ‘Can a fixed term annuity reduce my tax burden?’ below.
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.
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.
The amount of income you receive from a fixed term annuity will depend upon several factors. These include the size of your pension fund, your age 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.
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 2022/23), 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.
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.
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.
When you become eligible to turn your pension pot into an annuity, your current pension scheme might offer you an annuity plan.
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’.
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. There’s no direct cost to you, as we receive commission from your chosen annuity provider if you go ahead with your annuity.
In fact, we’re 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.
As with all big financial decisions, choosing to take out a fixed term annuity involves certain risks as well as benefits:
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 email@example.com.