Fixed-term annuities

With a fixed-term annuity you use all or part of your pension pot to buy a retirement income for a set number of years. In contrast, a lifetime annuity pays a retirement income for the rest of your life.

How do fixed-term annuities work?

A fixed-term annuity provides a regular retirement income for a number of years – often five or 10 – as well as a ‘maturity amount’ at the end of the specified period. You can then use the maturity amount to invest in another retirement income product, such as another fixed-term annuity or a lifetime annuity or you can take money out of your pension. You don’t have to buy an annuity to generate an income from your pension.

When buying a fixed-term annuity, you choose:

  • The term, which is usually between three and 20 years.
  • Annuity options, such as single or joint, fixed or increasing income – much the same way as when buying a lifetime annuity. See our guide on Using your pension pot to buy a lifetime annuity.
  • Whether you want the annuity to deliver a guaranteed or an investment-linked income.

With a fixed-term annuity paying a guaranteed income, you can also choose the level of the income and the maturity amount you’ll need to invest at the end of the term. The higher the income you choose, the lower the maturity amount will be.

Is a fixed-term annuity suitable for you?

This section outlines the potential risks and benefits of fixed-term annuities. However, the rules for how you can take your pension have changed – see the next section. Get advice before deciding how to take your pension.

Fixed-term annuities have increased in popularity as the income from more conventional lifetime annuities has fallen.

They are very flexible but there are risks. The main risk is that changes in market conditions could mean the maturity amount you receive at the end of the fixed-term period isn’t enough to provide you with the retirement income you need. This might be because annuity rates have fallen during the fixed-term period.

However, it’s also possible that the retirement income you could buy at the end of the fixed-term period is higher, perhaps because annuity rates have improved, or your health has deteriorated so you are then eligible for an enhanced annuity.

The main benefit of a fixed-term annuity is that it allows you to keep your options open – you avoid locking in to a lifetime annuity at the outset. When the term ends, you can shop around again for whatever type of pension product and features match your circumstances at that time.

Get advice before taking out an annuity

New rules introduced in April 2015 mean that once you’re 55 you now have complete flexibility over what you do with your pension pots. You can take cash out of your pension, leave it where it is or use some or all of it to buy an annuity.

For an overview of all of your options and to find out where to get help and advice, including free government-backed guidance from Pension Wise, see our guides below or find out more about your options with our Retirement income options tool.

Options for using your pension pot

When and where to get pensions help and advice