The difference between lifetime and fixed term annuities - in fewer than 400 words!

14 December 2017

We asked our Annuity Specialists to cut through some of the complexity of annuities, challenging them to put together a mini-guide to two of the main types: lifetime and fixed term annuities. To make it harder for them (but easier for our readers) we asked them to do it in under 400 words. Here’s what they came up with…

The essential difference is clear from the names of each product. A lifetime annuity pays a guaranteed income for the rest of your life. A fixed term annuity pays just for a fixed period of time. However, there’s a little more to it than that.

Lifetime annuity

There are two main types of lifetime annuity. First, a level annuity pays the same level of income forever. It offers the largest starting level of payments but over time they will be worth less in real terms due to the effects of inflation.

An escalating annuity starts at a lower amount than a level annuity. Payments then increase annually in line with inflation or at a specific percentage set at the start of the plan, for example 3% per year. You get some protection against inflation, but it can take  20 years or more before the total income you will have received matches what the level annuity would have paid out in the same period.

Fixed term annuity

A fixed term annuity pays an income for a term of your choice between one and 25 years. Fived  and ten-year terms are the most popular choices for our clients.

After taking up to 25% tax-free cash you have a choice of:

• Taking a regular income with a lump sum (often known as the maturity amount or value) at the end of the term; the larger the income taken, the smaller the lump sum. You can use the lump sum at the end of the term to buy another annuity or invest in another retirement income product.
  
  OR

• Taking a regular income to deplete the fund over the set term to potentially help minimise income tax.

This type of annuity can be suitable if you want to leave your options open rather than committing now to an annuity for life. It could also be chosen if you expect future annuity rates to rise, potentially benefitting by arranging an annuity in a few years’ time at a higher rate. (Being older by then will itself attract a higher rate, although of course rates in general could be lower.)

Enhanced annuities

A lifetime annuity can be offered on an enhanced basis to provide additional income. An enhanced annuity may be available if you have been diagnosed with an illness, have other health problems, or if your lifestyle includes habits such as smoking or drinking. 

Helping you choose the most suitable type of annuity

As well as the choice between a level or fixed term annuity, you can also look at options such as adding death benefits to your annuity. Retirement Line’s Annuity Specialists are here to help guide you through your options.

Please contact us on 0800 652 1316 or info@retirementline.co.uk if you would like information and guidance, including quotes to find out what level of retirement income you could achieve.