Any pension Annuity comparison will show how far Annuity rates have dropped in recent months. Statistics showing that Annuity rates have fallen in each of the past four years and by around 40% over the past 16 years emphasise the point still further.
The Annuity problem
Whilst buying an Annuity when rates are low is understandably unattractive, for many people who need the income and want a simple and guaranteed solution the perception is that there is little alternative.
Enter the Fixed Term Annuity, could this be the answer to creating an immediate income, without locking into all time low Annuity rates?
For some the Fixed Term Annuity could indeed be an ideal solution.
How does a Fixed Term Annuity work?
Your existing pension funds, less any tax free cash that you wish to take, are transferred into the Fixed Term Annuity.
You then have a number of decisions to make:
Term. How long do you want the Fixed Term Annuity to run for? Typically a period of between 3 and 10 years is chosen, however you can opt for a longer period if you wish
Income. The level of income want. This can be set between zero, for people who simply want to take their tax free lump sum, and an upper level, which is decided upon by the Government Actuary’s Department but is broadly equivalent to a single life Annuity
Options. What options would you like to be included in the Annuity? All the usual choices, such as guarantee periods, spouse’s pension, and indexation options are available.
These decisions, plus other factors outside your control, dictate the level of income available to you from the Fixed Term Annuity.
The guaranteed level of income is paid to you until the end of the fixed term, when you will be given a Guaranteed Maturity Amount (GMA) which you are then free to invest in another retirement income product. This could be another Fixed Term Annuity, a traditional Annuity or even an Income Drawdown plan.
How does the Fixed Term Annuity help me avoid current Annuity rates?
It’s a well-known fact that if you buy a traditional Annuity the rate you get will never change; if Annuity rates rise in the future you will not benefit. This is particularly pertinent at the moment as rates are so low.
There are essentially two ways in which a Fixed Term Annuity can help.
- You will not be locking in for life to today’s low Annuity rates, clearly rates could have fallen further at the end of your fixed term, however the hope of course is that they have risen
- You may be in good health now but delaying the move to a traditional Annuity may mean your health has deteriorated to a point where you qualify for an Enhanced Annuity. Which as we all know, can have a significant impact on your Annuity rate
Are there any other advantages of a Fixed Term Annuity?
Indeed there are:
- Both the income and the maturity value are guaranteed and not subject to investment performance
- You can reassess your circumstances at the end of the fixed term and tailor the next solution to your needs at that time
- If you need less income than the maximum available your Guaranteed Maturity Amount will be higher, potentially giving you a larger income in the future
- Your spouse or dependents will have the ability to receive a lump sum on your death
What are the disadvantages of a Fixed Term Annuity?
As with any financial product there are disadvantages:
- You do not have a guaranteed income for the rest of your life. Your Guaranteed Maturity Amount may provide you with less income in the future, especially if Annuity rates have fallen further when you come to the end of your fixed term
- Once the Fixed Term Annuity has started the level of income and options chosen cannot be changed until the end of the fixed term
So, is a Fixed Term Annuity right for me?
That really isn’t something we can answer without knowing more about your individual circumstances.
However, we can say that if you do not want to lock into today’s low Annuity rates then you should investigate a Fixed Term Annuity, along with other options such as Income Drawdown, to see whether it works for you.
Our team of advisers are highly experienced in providing independent financial advice to people nearing retirement. If you would like advice on your pension options do not hesitate to call them today on 0115 933 8433 or email at info@investmentsense.co.uk
