Is a Fixed Term Annuity right for you?
If you have heard that annuity rates are not as high as they have been and you are not sure if you want to buy one when they are low.
If you think that your health is likely to worsen in future years.
If you not sure what type of annuity to purchase at the moment in case your situation changes.
If you prefer the benefits of drawdown but would like the some certainty in your future fund value.
If you would like the improved death benefits that drawdown provides but would like some guarantees
If you would like to run down your fund over the coming years and would like the certainty of a guarantee
Then perhaps a fixed term annuity could be the solution for you.
A Fixed Term annuity enables you to take your tax free cash and also take a pension income. They enable you to take as much income as you want and the remaining fund is invested in secure investments. This product provides certainty with flexibility as you have not converted your pension into an annuity and you therefore keep your options open.
Once you have taken your tax free cash with a Fixed Term Annuity, you fix your income for a period of time. Your pension fund is removed from the volatility of the financial markets and you are given a guaranteed maturity value that the fund will be worth at the end of the term. With this maturity value at the end of the term you can purchase another pension product eg. an annuity or to continue in drawdown.
Whilst there is some fund growth during the length of the term it is not significant, however you do have the confidence in knowing what you fund will be worth.
Generally you can earn more in the short term but this may mean that you could earn less in the longer term.
- If interest rates and therefore annuity rates rise then your income after the period will be higher than if they stay the same should you wish to convert to an annuity.
- If your health worsens slightly it may enable you to obtain an Enhanced Annuity, or a larger enhancement and therefore greater pension income.
- If there is a change in your circumstances eg you marry, your spouse dies, or your spouse has sufficient benefits of there own you can take out an annuity which is more appropriate.
If either one or more of these circumstances became a reality then you would have the opportunity of achieving either a higher annuity rate or a more appropriate type of annuity, therefore providing greater peace of mind.
Even a 0.5% increase in interest rates and annuity rates would make a difference
If you health worsened marginally it would make a difference.
If both of these scenarios came to be then you may have more income now and more income in the future.
Lets consider the annuity rate issue…
Annuity rates have been at a historical low largely due to world wide interest rates and life expectancy. Whilst it is probably safe to say that life expectancy will continue to have a negative impact on annuity rates this is not necessarily the case with interest rates.The current world wide trend is seeing interest rates stable however there is continued discussion regarding when interest rates will rise and the current forward guidance from the Bank of England suggesting a rise is likely at some point in the future late this year or perhaps early next.
Is your health likely to worsen in the next few years?
In reality you may not know the answer to this question however normally peoples health worsens as they get older rather than improves. This may not always be the case though.
If you do have significant health conditions this may not be the best solution for you…
If you could obtain a significant uplift in your annuity through an Enhanced Annuity then this product may not be appropriate for you. The Fixed Term Annuity break even points are normally longer if you have little to no health and lifestyle conditions and only qualify for a Lifetime Annuity or a moderately enhanced annuity. If you could have your annuity enhanced due to your health and lifestyle conditions this will shorten the break even points.
When considering a Fixed Term Annuity, we recommend that you are clear of the technicalities of this product.
We provide a free no obligation service where we can help you understand your individual circumstances with regards to Fixed Term Annuities. We can identify break even points with differing scenarios so that you decide whether this is the right product for you.