Short guide to Fixed Term Annuities
Annuity rates are currently at a record low making buying a standard annuity increasingly unattractive for many retirees. Once an annuity is bought it cannot be altered, which is why many retirees are adverse to the idea of buying one now and committing 100% of their pension fund. For this reason alternatives to buying a life annuity have become more prominent, as people look for a more flexible option. One of the main alternatives is that of income drawdown which allows a retiree to drawdown their income each year, subject to annual withdrawal limits known as the GAD rate. These are set by the government and are, like annuity rates, based on the performance of gilt yields. However the GAD rate has also fallen victim to poor gilt returns, making drawdown a less appealing alternative to an annuity. On top of this recent compulsory fund reviews has resulted in lowering the monthly income for many of those people who took out a drawdown policy 4 or 5 years ago.
So with life annuities perceived as poor value and drawdown being seen as high risk, there has been much discussion around the other alternative of fixed term annuities, also known as temporary annuities. These allow retirees to receive an income from their pension fund whilst also holding some of their money back for the future. The minimum term for a temporary annuity is 3 years but the average is normally either 5 of 10 years. You can agree what is known as maturity amount which is paid out at the end of the plan which can be used to buy another annuity or related retirement product. You can also build in death benefits so that if you pass away prematurely you can pass on your annuity income (or part of it) to a partner or spouse. The key benefit from taking a fixed term annuity is should circumstances alter in the future you can potentially benefit. These can be economic circumstances whereby there has been an increase in annuity rates or changes to your own personal circumstances. For example if your health has deteriorated at the end of your fixed term annuity plan you maybe eligible for a higher paying enhanced annuity.
Critics of fixed term annuities point to the fact that there is no guarantee rates will improve in the future. In fact, given the current factors that are pushing downward pressure on rates seem set to continue, one could on balance say it is unlikely that rates will increase in the medium term. Secondly some have voiced concerns that potential changes to government policy surrounding tax and pensions could result in income levels being affected. However, supporters of fixed term annuities say that aside from issue of rate changes, fixed term annuities offer flexibility. If your partner passes away and/or your health changes then you will be able to pick an annuity that suits these changes, something you cannot do when purchasing a level annuity.
Further Reading..
Fixed-term annuities could leave pensioners in a fix, warns insurer
Just Retirement- Fixed Term Annuity
William Burrows - Fixed Term Annuities
