Want the guarantees of an annuity but still some level of flexibility?
Fixed term annuities could be for you!
Why choose a fixed-term annuity? and what is it anyway?
This is best explained with some examples. Please note, the figures provided were accurate as of September 2023.
This is John. John is 60 and has £133,000 in his pension fund. He is continuing to work part time but wants some extra income every year until his state pension starts.
He takes £33,000 tax free cash and puts the rest into an fixed term annuity for 5 years.
With his initial £100,000 in, he gets £6,246 every year for 5 years, and at the end of the term, he gets back £93,402.
In this example, he converts his £100,000 initial sum into a total of £124,632. (5 x £6,246, plus his £93,402 fund returned)
And of course, this is all guaranteed, so he knows where he is for the next 5 years.
This is Dave. He is 55 and wanting to retire in 10 years. He has £200,000 in his pension and wants to pay off the little bit he has left on his mortgage and do some improvements to his house.
He takes £50,000 as tax-free cash for his mortgage and renovations, and puts the rest (£150,000) into a fixed term annuity. He has no need for the income as he is still working and has a comfortable level of income that the extra monthly (taxable) income from the fixed term annuity is of little benefit.
Because of this, he chooses to “roll up” the income, this is where no money is paid back to him and is put back into the fixed term annuity.
With this option, his £150,000 is put into the fixed term annuity, over 10 years, and at the end has a fund returned to him of £250,000 – which is of course, guaranteed.
Though he could have chosen to invest it, he didn’t want to take on the risk of stocks and shares and wanted to have a guaranteed fund value when he reaches retirement.
Meet Alice. Alice is 70 and has £75,000 left in flexi-access drawdown after retiring at 60. She has taken a sustainable income of around £3,000 a year (4%) from this over the past decade, but is concerned that her bills have gone up recently and is worried about her money being invested and dropping in value.
She thought about a lifetime annuity but realises that she doesn’t want to lose the flexibility of drawdown but wants stable returns over the next 5 years.
By using her fund in drawdown for a fixed term annuity, from her £75,000 initial into the fund, she receives an income of £3,900 a year (5.2%) and then at the end of 5 years, she gets her £75,000 returned to her!
So over the 5 years, she earns nearly a total of £20,000 and guaranteed her £75,000 back.
At that point she will be 75 and have the choice to go back into drawdown, repeat the process again, or purchase a lifetime annuity (at which point she will be older so the rates could have improved).