Fixed term annuities

Albermarle

Just browsing some retirement options and I came across fixed term annuities . I have searched for some threads but only come up with posts about the more usual lifetime annuities .
It seems you can fix an income for between 3 and 20 years , with or without a lump sum at the end , with or without inflation linking etc.
Although there is an obvious disadvantage in that it is not a guaranteed income for life but they could be a useful/simple tool to bridge a gap maybe ( Like between retirement and receiving SP ) if you had other pension resources for later .
Anybody have any views on these little mentioned products ? old fashioned, bad value for money, OK in the right circumstances etc ?

Brynsam

Remember you can't use your pension savings to buy one of these (unless you cash in the pension first and then it becomes 'your own' cash).

Excellent in the right circumstances - and the favourable tax treatment of the annuity helps. Because you bought it with your own money, part of each annuity payment is treated as a return of your capital and isn't subject to tax (the rest is taxed normally).

Linton

Brynsam wrote: »

Remember you can't use your pension savings to buy one of these (unless you cash in the pension first and then it becomes 'your own' cash).

Excellent in the right circumstances - and the favourable tax treatment of the annuity helps. Because you bought it with your own money, part of each annuity payment is treated as a return of your capital and isn't subject to tax (the rest is taxed normally).

You can in principle use pension savings for a fixed term annuity. See https://www.legalandgeneral.com/retirement/our-products/fixed-term-retirement-plan/ for example. However if you are of average health I would expect the advantage over simply drawing down cash for the same limited period would be approximately zero or possibly negative once charges are taken into acount.

Albermarle

It was the L&G one I saw and it was a pension related product , as some others seem to be . One point made is that they can be a useful alternative way of getting at the pension pot quite quickly . eg take 25% TFC and then the rest over just a few years so as to avoid paying HRT for example.
I presume you would have to get an actual quote to compare with just drawing down the cash but like said would probably be similar.

westv

Brynsam wrote: »

Remember you can't use your pension savings to buy one of these (unless you cash in the pension first and then it becomes 'your own' cash).

Excellent in the right circumstances - and the favourable tax treatment of the annuity helps. Because you bought it with your own money, part of each annuity payment is treated as a return of your capital and isn't subject to tax (the rest is taxed normally).

I think you are confusing the fixed term annuity with a purchase life annuity.

Audaxer

Linton wrote: »

You can in principle use pension savings for a fixed term annuity. See https://www.legalandgeneral.com/retirement/our-products/fixed-term-retirement-plan/ for example. However if you are of average health I would expect the advantage over simply drawing down cash for the same limited period would be approximately zero or possibly negative once charges are taken into acount.

Just looked at the example in the L&G link above, and agree it doesn't look a great deal. Example shows Katherine 55 pays £50k from her pension pot to get a fixed income of £4,900 per year for 5 years and a lump sum of £27,800 at maturity. So for her £50k she gets back a total of £52,300 over 5 years. She could just have deposited it in savings accounts returning 1.5% interest per annum to get roughly the same return over the 5 years.

westv

Audaxer wrote: »

She could just have deposited it in savings accounts returning 1.5% interest per annum to get roughly the same return over the 5 years.

Not without paying tax getting it out of the pension though.

Malthusian

Albermarle wrote: »

they could be a useful/simple tool to bridge a gap maybe ( Like between retirement and receiving SP ) if you had other pension resources for later .

One of very few situations in which they are useful. You need:

1) Known and fixed dates for when your income requirement begins and ends (otherwise the loss of flexibility is a problem)
2) No other income or resources, i.e. no capacity to absorb short term falls in value

This is an increasingly rare situation. It is a potential textbook solution, but in reality the return you get for giving up the flexibility of a drawdown pension invested in cash - about 1.5% per year - is not enough.

Albermarle

The other problem is that you have to agree the terms/ annual payments in advance , Whereas if you did something similar via cash dradown account you could vary the amount taken each year