Need Income Before Your Pension Starts?

If you’re thinking about stepping away from full-time work—whether gradually or all at once—but you’re not quite ready to draw your State Pension or other long-term retirement income, a fixed-term annuity could offer a useful solution.

Many people find there’s a gap between winding down work and receiving regular pension income. It might be a few years of part-time earnings before reaching State Pension age, or simply a personal decision to retire early. Either way, the reduction in income during this transition can be challenging—especially if you’re still paying a mortgage or covering other big expenses.

This is where a fixed-term annuity may come into its own. It offers guaranteed income for a set number of years, helping to smooth the financial path towards full retirement.

What Is a Fixed-Term Annuity?

A fixed-term annuity is a financial product that allows you to turn part of your pension pot into a guaranteed income for a specific period. While most people choose a term of five to ten years, you can opt for anything from one to 25 years, depending on your needs.

Unlike a lifetime annuity, which pays an income for the rest of your life, a fixed-term annuity stops at the end of the agreed period. This makes it particularly useful for bridging a short-to-medium gap—such as the years between retiring from work and beginning to draw your State Pension.

You can choose to take the full income available from your annuity, or opt for a lower income in return for a lump sum at the end of the term. This final payment is known as the Guaranteed Maturity Amount (GMA), and it can be taken as cash (subject to tax), or used to fund another retirement product like an income drawdown or lifetime annuity.

Peter’s Story

Peter is 61 and plans to retire fully at 68, when his State Pension and largest pension pot will become his main sources of income. For now, he’s stepped back to three days a week at work, but his earnings aren’t enough to cover all his costs.

Peter decides to use a smaller pension pot to buy a fixed-term annuity that will pay out for seven years—just enough to top up his part-time wages and give him a dependable income. He chooses to leave a portion of the annuity’s value untouched, which will become his GMA at age 68. At that point, he plans to explore either drawdown or a lifetime annuity using the remaining pot.

By taking this approach, Peter secures peace of mind during the transition and preserves flexibility for when he stops working altogether.

(This is an illustrative example only. Your personal circumstances may differ, and it’s important to seek professional guidance before making any financial decisions.)

Why Consider a Fixed-Term Annuity?

The idea of retiring early appeals to many, but the financial reality can be more complicated. According to research by Legal & General, over 2.8 million people aged 50 and over in the UK have returned to work after retiring—largely due to income pressures.

Fixed-term annuities can offer a helpful balance: they provide stability without requiring a lifelong commitment. Whether you’re easing into retirement gradually, managing a health-related change in circumstances, or simply want predictability for a few years, this option can provide valuable breathing space.

Tailoring an Annuity to Fit Your Needs

Fixed-term annuities are flexible in structure. You’ll need to consider how long you want the annuity to last, how much income you’ll need, and whether a lump sum at the end of the term is important to you.

If your priority is steady income now, you might choose the highest regular payments possible. If future options matter more, you could take less income in return for a higher GMA later on. A qualified adviser can help you find the right balance.

Fixed-Term Annuities Are Growing in Popularity

Interest in fixed-term annuities has increased significantly in recent years, as more people look for flexible ways to manage income in the lead-up to retirement.

Lorna Shah, CEO of Legal & General Home Finance and Managing Director of Retail Retirement, noted that sales of fixed-term annuities more than doubled in the previous year. She described the products as a helpful way for people to access a “predictable and flexible retirement income” during a period when they may still be earning part-time or scaling back from full-time work.

Her comments reflect a broader trend. In September 2024, Standard Life introduced its own fixed-term annuity product—further evidence of rising demand. As more individuals choose phased retirement or juggle seasonal or part-time jobs in later life, there’s a growing need for income solutions that can adapt to changing circumstances.

Fixed-term annuities appear to be meeting that demand—offering a structured, short-to-medium term financial bridge for those who aren’t yet ready to commit to lifetime solutions but still want security and clarity in the meantime.

Key Benefits and Considerations

Like any financial product, a fixed-term annuity has both advantages and limitations. Understanding these fully can help you make a more informed decision about whether it fits your overall retirement strategy.

Why many people find them useful:

One of the biggest attractions is certainty over income. You’ll know exactly how much you’ll receive each month, and for how long. That level of predictability can make it much easier to plan and budget, especially if your other income sources are irregular.

They’re also highly flexible in design. You choose the term length, the income level, and whether to leave a lump sum—called a Guaranteed Maturity Amount—for the end of the plan. This allows you to tailor the annuity to your circumstances, whether you need a short-term income top-up or a structured financial bridge to full retirement.

There are no ongoing fees to manage once the annuity is in place. Everything is agreed up front, so you won’t be dealing with hidden charges or unexpected deductions.

And for those taking early retirement—particularly due to health concerns—there’s a reassuring sense of financial stability. With a guaranteed income in place, you don’t need to rely on investment returns or take on the uncertainty of drawdown products unless or until you’re ready.

But it’s also important to consider the following:

Fixed-term annuities are a committed arrangement. Once set up, they’re designed to last the full term. That means you can’t usually access your money early or adjust the income mid-way through. Some providers may allow limited flexibility, but it will reduce the value of the final lump sum if one is included.

You also need to be aware of income tax implications. Like other pension withdrawals, the income you receive is taxable. Anything above your personal allowance will be taxed at your marginal rate, so it’s worth factoring that into your planning.

And finally, remember that the money you use to buy the annuity is no longer available for other uses. It’s vital to think about how this fits into your long-term plans, especially if you want to preserve flexibility for later life or leave funds for inheritance.

Fitting It Into Your Broader Retirement Plan

A fixed-term annuity can be a valuable part of your retirement strategy—but it’s rarely the whole solution. Many people find that combining one with other sources of income, such as savings, part-time work, or other pensions, helps them create a more flexible and resilient plan.

If you’re approaching retirement and want financial certainty without committing to a lifetime product, a fixed-term annuity is worth exploring. Just make sure you understand how it fits into your wider financial picture—and get expert advice to help you make the right choice.