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Fixed Term Annuities

A fixed-term annuity is a relatively new form of annuity that guarantees an income for a set number of years. It works by using all or part of a pension to fund payments for a certain period of time.

In simple terms, you choose the period of time you want the annuity to last. Generally, most people pick from three to 20 years. You can then decide if you want to use the maturity value to invest in another product such as a lifetime annuity, another fixed-term annuity or drawdown of income.

You also choose options such as whether you want the annuity to be a fixed value, or one that increases as it matures. You can also decide to keep the annuity individual or to have it jointly with a partner or spouse.

Why Have They Become Popular?

Recent problems in the financial markets have made many people reluctant to buy an entire lifetime annuity at today’s rates, which are at a historic low. Fixed-term rates are more flexible and provide the opportunity to change investments after a few years, rather than have all pension income tied up in a lifetime annuity.

But as with any financial product, there are risks and one product is not necessarily suitable for every investor. It is essential to ensure that a product suits your circumstances before you commit to it.

Advantages

You will not be exposed to investment risk and your income is guaranteed until the end of the annuity period. You know from the start of the plan what the Guaranteed Maturity Amount (GMA) will be and at the end of the fixed term you can use the GMA to buy another form of pension income that suits your needs at that time.

If you select the Value Protection Death Benefit, then your partner or spouse or any dependents will receive the full amount of the original price of the annuity, minus the value of any payments already paid. You can also choose for any surviving partner, spouse or dependent to be paid the pension after your death to ensure they receive an appropriate part of the GMA.

Disadvantages

You cannot alter your pension options during the fixed period, so you cannot take into consideration any changes in your personal circumstances that may occur. Your pension is based on annuity rates at the time you purchase the fixed-term annuity. If, as is the case currently, rates are very low then this is reflected in the amount you receive.

Your income will be exposed to the risk of inflation reducing its value during the period of the fixed term unless you include inflation-proofing, which incurs an additional cost.

It is also absolutely vital that you take independent professional advice before committing yourself to any major financial decision.

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