Tag Archives: Lifetime Annuity

Why Choose a Fixed Term Annuity?

Throughout your working life you save hard to provide for your income needs in retirement, so as the day approaches you have many choices to consider.  Will you chose to annuitise or go for the income drawdown route?  Even if you choose to go for an annuity you need to consider all the variations that are available.

A standard compulsory purchase annuity (or Lifetime Annuity) is purchased after any tax free cash has been taken and is then offering a guaranteed income for life.  The terms offered at the start may be based on you being fit and well when you first enter retirement and would therefore be based on your normal life expectancy.  The danger is that you could be annuitising too soon.

An alternative that should be considered is the Fixed Term Annuity which as the title suggests is a temporary measure for providing an annuity income. These schemes provide you with the guaranteed level of income you may require but for a specified period of time.  In addition to the guaranteed income they will also guarantee a maturity value which is known as the Guaranteed Maturity Value (GMA).  At the maturity date you are then free to take out another Fixed Term Annuity or consider moving into Income Drawdown, Conventional Lifetime Annuity or Investment Linked Annuity.

Choosing a Fixed Term Annuity will give you added flexibility as you are making a decision for your income for a specified term rather than one that will last your lifetime.  You can also choose this type of plan to access your Pension Commencement Lump Sum (tax free cash) and take no income for the duration of the fixed term.  You will then receive a guaranteed return at maturity.

By deferring your annuity purchase you may find that later in life you health has deteriorated and you could at that point secure benefits under an enhanced annuity therefore giving you the potential for your income in retirement.

You can include various options within the Fixed Term Annuity Plan to offer your loved ones some protection.  You can set up the payments so that they continue to pay to a spouse, civil partner or financially dependent partner should you die during the fixed term.  You could also structure these plans to ensure that the income will be paid for a specific number of years from inception even if you should die during this term this is known as a guarantee period.

In a similar way to Income Drawdown Fixed Term Annuities must be reviewed every three years for those aged under 75 and annually for those aged over 75.  Even if the term of the plan is over three years a review of the maximum income level is still required.  Income levels may need to be reduced should the government lower the GAD rate.

Use your Pension Fund to purchase a Lifetime Annuity

A Lifetime Annuity is a way to turn your pension savings into an income during retirement. While some annuities last for a fixed period of time such as five or ten years, a lifetime annuity can go on until the day you die. Lifetime annuities can therefore be a way to ensure that your savings provide a guaranteed income for the rest of your life.

There are different ways in which a pension fund can be used for financial security during retirement and annuities are one of them. You can purchase an annuity with a lump sum – which can either be all or part of your pension savings. How much income you could generate depends on the size of your pension pot and how much of it you wish to invest in an annuity. Up to 25% of your pension fund can be released as a tax free lump sum and a large proportion of people use this to invest in an annuity.

How much income you can generate also depends on other factors such as annuity rates, your lifestyle and health criteria etc. Just like enhanced mortgages – there are enhanced or impaired lifetime annuities for people with certain health and lifestyle indicators. A shorter than average life span allows annuity providers to pay out more than they would normally as the expected term of the annuity is shorter than average.

As mentioned earlier, a lifetime annuity is guaranteed to continue generating an income until the end of your life, and as such, can never be completely used up. It guarantees an income for as long as you live – which can be a significant factor at a time when people are living for longer than ever before. There are different types of lifetime annuities – such as level annuities and investment linked annuities.

You can also add additional features to annuities such as protection from inflation, joint annuities for a partner to continue receiving income after you are gone etc. Adding these bells and whistles to a lifetime annuity will affect the income you receive. For instance, inflation linked annuities increase over time – so the income received initially is normally much lower than you would on a level annuity.

Investing in a lifetime annuity is one of the most popular ways to provide financial security during old age. There are many different types of annuities and several annuity providers on the open market – the best way to find an annuity that will suit your individual circumstances is to shop around.