Fixed Term Annuity

A type of Guaranteed Drawdown product designed to allow you to access your pension in a more flexible manner than purchasing a set income for the remainder of your life which is what a lifetime pension annuity does.

With a fixed term annuity you can access your Tax Free Lump Sum which is normally up to 25% of the total pension investment and draw whatever income is required from the remainder or leave it alone for a set period of time (usually a minimum of 3 years).

They provide the reassurance of knowing exactly what return will be achieved from your pension investment and can be set up to provide income and/or a guaranteed maturity value at the end of the term.

A fixed term annuity might be suitable for you if:

  • You want to access your Tax Free Lump Sum but are not yet ready to commit to a fixed income from the balance of the investment for the rest of your life.
  • You believe annuity rates will increase as a result of higher interest rates in the future.
  • You think you might become eligible for an enhanced annuity at some point in the future.
  • You require a guaranteed maturity value at the end of the plan term.
  • You want to control and manage your pension’s liability to income tax.
  • You are not yet ready to fully retire.

These types of arrangements are suitable for people who want the certainty of knowing exactly what their pension investment will return regardless of stock market conditions or life expectancy and suit the more cautious investor.

A fixed term annuity will usually allow you to build in death benefits should you die before the end of the term such as ‘value protection’ which guarantees that at least the initial investment is returned or ‘plan protection’ which guarantees the plan will continue to as you originally intended up until the maturity date in the event of early death.

Rules

There are certain rules which apply to this type of pension arrangement, the main one’s are:

  • Normally up to 25% of the initial investment can be taken as a tax free lump sum.
  • Income drawn after any tax free lump sum has been paid is treated as ‘Earned Income’ and subject to income tax and paid under normal PAYE rules with tax deducted at source.
  • Any death benefit is paid free of tax if the plan owner dies before age 75.
  • Any death benefit is subject to tax (currently 55%) if the plan owner dies after age 75.
  • When taxable income is drawn after any tax free lump sum has been paid the amount that the plan owner is allowed to invest into a new pension investment reduces to £4,000 per annum.

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