What Is a Fixed-Term Annuity?

A fixed term annuity offers a way to secure a guaranteed income from your pension savings over a defined period—without locking into a lifetime commitment. It allows you to keep future options open, including the possibility of taking a cash lump sum or purchasing another income product later on.

In this guide, we’ll explore how fixed term annuities work, who they might suit, and the risks and benefits involved. Whether you’re aiming to bridge a short-term income gap or prefer not to commit to a lifetime annuity just yet, this option could offer a valuable degree of control over your retirement income.

What Is a Fixed Term Annuity?

A fixed term annuity allows you to convert part or all of your pension pot into a regular, guaranteed income for a specific number of years—typically between one and 25. During this time, you receive income payments at agreed intervals, and at the end of the term, you receive a lump sum known as the Guaranteed Maturity Amount (GMA).

You can also take up to 25% of your pension fund as tax-free cash at the outset, as with other annuity products. The remaining balance can be used to generate income or left to grow at a guaranteed rate.

Unlike lifetime annuities, fixed term annuities do not commit you to an income for the rest of your life. Instead, they offer the flexibility to reconsider your options when the term ends—whether that’s using the GMA to purchase another annuity, enter drawdown, or take some or all of it as taxable cash.

How It Works in Practice

You can choose to receive income throughout the term, or none at all. If you take zero income, your GMA at the end of the term will be maximised, as the remaining fund grows at a guaranteed rate.

Alternatively, you might prefer to take a moderate income and leave a portion of your fund untouched. This allows for some income now, while still securing a future lump sum. The income and GMA are both calculated based on the rate offered at the outset, which remains fixed throughout the term.

Once the fixed term ends, you can:

• Buy another fixed term or lifetime annuity
• Move into an income drawdown plan
• Take the GMA as a lump sum (subject to income tax)

Why Might Someone Choose a Fixed Term Annuity?

The main appeal of a fixed term annuity lies in its flexibility and the ability to reassess your retirement income strategy later.

For example, Helen, aged 61, wanted to reduce her working hours but wasn’t yet eligible for her final salary pension. By purchasing a fixed term annuity for five years, she secured a reliable income to supplement her earnings, with the option to reconsider her choices once her other pensions became accessible.

Others may use a fixed term annuity to delay making a permanent decision about their retirement income. For instance, if annuity rates are currently low, this approach allows you to defer a lifetime commitment in the hope of securing better terms later on.

You might also use a fixed term annuity to structure income in a more tax-efficient way—especially if withdrawing the full amount as a lump sum would push you into a higher tax band.

How Much Income Will I Receive?

The amount of income you receive will depend on several factors:

• Your age and health at the time of purchase
• The size of your pension pot
• The length of the fixed term
• Whether you choose a level or escalating income
• The annuity rate available at the time

Some providers also offer plans that allow for inflation-linked income, which rises each year in line with the Retail Price Index or a fixed percentage. Others offer level income, which remains the same throughout the term.

Choosing to take no income (or a lower level of income) will result in a higher GMA at the end of the term.

Lifetime Annuity vs Fixed Term Annuity

You may also be considering whether a lifetime annuity or a fixed term annuity suits you best.

Lifetime Annuity

• Pays an income until you die.
• Set it up once, and it can’t be changed.
• Ideal if you want long-term financial certainty.

Fixed Term Annuity

• Pays an income for a set period—usually 5 to 10 years.
• At the end of the term, you’ll receive a guaranteed lump sum (the “maturity amount”).
• Offers flexibility to review your options later—such as moving into drawdown or buying a new annuity.

If you’re unsure what the future holds or want to keep your options open, a fixed term annuity might be worth exploring.

Death Benefits and Joint Plans

Fixed term annuities often include built-in death benefits. These can provide financial support for your spouse, partner, or other dependants if you pass away before the end of the term.

Options typically include:

• Joint life annuity: Continues to pay income to your chosen beneficiary for the remainder of the term.
• GMA transfer: The remaining value of the plan, including the guaranteed maturity amount, can be passed on.
• Lump sum protection: In some plans, the full value of your fund is protected and returned to your estate or beneficiary.

You don’t need to be married to select a joint life annuity. Most providers allow you to nominate any financial dependant, typically aged 40 or over.

Can I Make Changes or Withdraw Funds?

Fixed term annuities are generally designed to be fixed for the term. However, some providers, such as Legal & General and LV=, offer greater flexibility—including the ability to transfer out early or make partial withdrawals.

In Legal & General’s Fixed Term Retirement Plan, for instance, policyholders can take up to three withdrawals during the term. Each withdrawal reduces the GMA accordingly and is subject to certain rules and charges. This may be useful if your circumstances change unexpectedly and you need access to extra funds.

Health and Enhanced Income

Unlike enhanced lifetime annuities, fixed term annuities do not offer increased income based on health conditions or lifestyle factors. If you are in poor health or have a medical history that could shorten your life expectancy, an enhanced annuity might offer better long-term value.

That said, a fixed term annuity can serve as a stepping stone. For example, if you’re currently in good health but wish to retain the option of applying for an enhanced annuity later—should your health deteriorate—a fixed term annuity allows you to delay that decision.

What Happens at the End of the Term?

At the end of the term, the GMA becomes available to you. You can then:

• Purchase another fixed term or lifetime annuity
• Apply for an enhanced annuity if eligible
• Enter drawdown to manage your own withdrawals
• Take some or all of the GMA as a cash lump sum (subject to income tax)

The options you choose will depend on your financial needs, health, market conditions at the time, and whether your objectives have changed since the annuity began.

However, it’s worth noting that the value of the GMA may not always be sufficient to provide the same level of income for the rest of your retirement—especially if rates have fallen or inflation has eroded its value. Forward planning is essential.

Could a Fixed Term Annuity Help with Tax Planning?

Yes. A fixed term annuity can help you spread your retirement income over several tax years, rather than withdrawing a large sum all at once.

This approach may reduce the amount of income taxed at higher rates. For example, instead of taking a full lump sum and paying 40% or 45% on part of it, you could take the 25% tax-free portion now and receive the remaining 75% gradually as regular income, potentially staying within a lower tax bracket.

As always, tax treatment depends on your personal circumstances and UK tax legislation, which may change.

What Are the Benefits and Risks?

Fixed term annuities offer several advantages, but they are not without drawbacks.

Benefits include:

• Guaranteed income for a defined period
• Flexibility at the end of the term
• Access to a guaranteed maturity amount with no investment risk
• No ongoing charges or annual fees
• Opportunity to reconsider your options as your needs evolve
• Ability to withdraw tax-free cash without committing to a lifetime income

Key risks to consider:

• Annuity rates may be worse when your term ends
• Inflation can reduce the real value of level income
• You may miss out on potential investment growth
• The GMA may not be enough to meet your future needs
• Taking income could reduce your pension annual allowance
• If you pass away without selecting death benefits, payments may stop

Should I Use My Current Pension Provider?

Not necessarily. Many providers do not offer fixed term annuities at all, and those that do may not provide the most competitive terms. It’s worth shopping around using the open market option to ensure you’re making the most of your pension savings.

As with any important financial decision, independent advice and a full market comparison are recommended.

Final Thoughts

A fixed term annuity can offer the reassurance of guaranteed income without tying you in for life. It’s a flexible option for those who want some certainty now, while keeping future choices open. As with any retirement income decision, it’s worth comparing your options carefully to find the right fit for your needs—both now and in the years ahead.