Worried about low annuity rates? Consider a short term annuity

There is no hiding from the fact that annuity rates are offering very little return for retirees in the current climate. One such option might be to consider a short term or fixed annuity in the hope that annuity rates recover in the future.

What are fixed term annuities?

Most people purchasing an annuity will look at a standard or conventional annuity which in exchange for your pension fund will give a fixed sum of income for the rest of your life.

The problem with this type of annuity is that rates are historically low offering poor returns which will also be eroded by the effects of inflation over time.

A short term annuity allows you to get an income for a fixed term, typically between 2-10 years, and then receive a guaranteed sum at the end which you could use to purchase another annuity, hopefully at a better rate.

The benefits of this type of investment

As said, with annuity rates are as low as they have ever been this form of investment means you won’t have to commit your entire pension fund to an annuity for life when it is offering such little value. Annuity rates are forecasted to rise given the recent recovery in Government GILTs and the reduction in the program of Quantitative Easing (QE), both which are seen as key influencers on the rates of annuities. A short-term annuity could therefore see you receive an income now and re-invest at a time when rates have returned to normal levels.

Ill health

You may also be able to add an option that allows you to exit your fixed term annuity in the event of ill health and swap for an enhanced annuity rate which will in turn offer a higher income. This is a popular option due to the high number of conditions that an enhanced annuity covers. See if you qualify for an enhanced annuity rate.

Risks and disadvantages

Of course there are risks to this type of investment to consider.  The first to note is that short term annuities are often written at lower rates than that of a standard annuity due to the short term nature of them.

You are taking a gamble on rates increasing and it is believed that you need rates to improve by 10% or more for the gamble to pay off from taking a standard annuity in the first place.

The other factor could be that annuity rates continue to decline and at the end of the fixed period, rates could be in a worse situation than they are now, although this is considered unlikely based on historical data.

Summary

Consider all your options carefully and always seek advice. Get an annuity quote today and see what options are available to you.