If the idea of committing your entire pension pot to a lifetime annuity seems unwise in the current economic climate, a short-term policy may provide the answer. Offering an agreed amount over a fixed term, usually around three to five years, short-term annuities are more flexible than their lifetime equivalents but still provide a regular income in retirement. Knowing precisely how much you will be receiving month by month and for how long is a comfort for many as they move towards retirement.
With the economy still in flux, short-term annuities allow policy holders to take a chance on interest rates. For example, if a three-year fixed-term annuity is taken out when rates are low, policy holders may then see rates rise in time for renewal. Although this is a hypothetical situation, it is one way to make the most of your pension fund. Along with this, you will have to decide the type of annuity you require in terms of annual payments. You can choose to keep the annuity level year after year but there is the option of a fixed-rate annuity where the amount increases at an agreed level each year. And there are also policies that increase based on the retail price index, a tangible indicator of the impact of inflation.
Personal circumstances may change, even during retirement, so the flexibility of short-term annuities may appeal. Changes in health, marital status and home ownership can all impact on the rates and policies offered to each individual. It is worth noting that short-term annuities are sometimes considered risky as a result of their fixed-term nature. For example, you may end up living a lot longer than predicted but run short of income as a result. It seems odd to consider long life as a negative, yet this, together with hoping that interest rates will rise, does mean that there are risks involved.
Although short-term annuity rates are lower than those for most long-term policies, many find that the flexibility offered makes them worthwhile financial investments. For those who are financially aware and happy to renew, alter or change policies completely at the end of the agreed time frame, fixed-term annuities can provide many benefits. Even if you are not quite as knowledgeable as some, financial advisers will be happy to help you make a decision that is right for you.
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