Fixed Term Annuity

Written by the Retirement Line Team

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.

On this page:

• ✔️ What is a fixed term annuity?
• ✔️ Why choose a fixed term annuity?
• ✔️ What happens at the end?
• ✔️ How much income will I receive?
• ✔️ Can a fixed term annuity reduce my tax burden?
• ✔️ What happens if I pass away during the fixed term?
• ✔️ Does a fixed term annuity take my health into account?
• ✔️ Do I have to purchase an annuity through my current pension scheme or provider?
• ✔️ What are the benefits and risks of a fixed term annuity?
  

Use our free annuity calculator

What is a fixed term annuity?

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: 

• 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. 

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.

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:

Keeping your retirement income options open

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. 

Access to the Guaranteed Maturity Amount (GMA) with no investment risk

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:

• With a fixed term annuity, your pension savings you don’t take as income will grow at a fixed rate. With drawdown, your fund will go up or down because it remains invested.
• There are no annual charges with a fixed term annuity as the cost is built into the annuity rate. With a drawdown arrangement you may incur five or six separate types of fee each year, according to Which?. 
• For an eligible claim, an annuity fund is 100% covered by the Financial Services Compensation Scheme, regardless of its value. Funds within a drawdown arrangement might only be covered up to a maximum of £85,000 per investment.

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. 

Make cash withdrawals

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.

To bridge an income gap

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. 

Tax efficiency

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.   

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, 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.

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 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.

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.

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 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.

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. 

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