Fixed-Term Annuity

Similar to a lifetime annuity, a fixed-term annuity (FTA) provides you with a guaranteed, secure income, but over a set period of years. Fixed-terms are available from a minimum of three years to suit your requirements. If you are looking to secure your income for the rest of your life, then a lifetime annuity may be more appropriate.

How does an FTA work?

As with all retirement income products, you can take up to 25% of your fund as a tax-free lump sum. The amount you have remaining is known as your ‘purchase fund’ and is used to set up your annuity.

When purchasing a fixed-term annuity, you choose how long you would like the plan to run (minimum of three years), and how much income you would like to take during that period. Your annuity provider will offer a rate and a guaranteed maturing amount (GMA); this is the amount your fund is worth at the end of the plan.

Example

In the example displayed in figure 1, the individual has £80,000 in pension savings, after taking their 25% tax-free lump sum they are left with a £60,000 purchase fund. After discussing with their independent financial adviser they decide to take out a five-year fixed-term annuity taking £3,000 of income each year.

At the end of the plan, their provider will offer a GMA of £46,803 which is made up of their £60,000 purchase fund, minus the £15,000 of income taken and growth of £1,803.

What happens next?

When your plan comes to an end (matures), your guaranteed maturity amount allows you to reconsider your options. At this point you should receive up to date advice, and either take out a further fixed-term annuity, move into drawdown, or take a lifetime annuity.    

£80,000PENSION SAVINGS£60,000PURCHASE FUND£20,000TAX-FREE LUMP SUM£3,000 - Year 1 Income£3,000 - Year 2 Income£3,000 - Year 3 Income£3,000 - Year 4 Income£3,000 - Year 5 Income£46,803GUARANTEED MATURITY AMOUNTFigures correct as of 10/07/20, based on a quotation by LV=

Figure 1: Example of a five-year fixed-term annuity.