Fixed Term Annuities

I have been looking at the current fixed term annuities recently on Moneyhelper. My overall perception is that over 20 years there will be much better return than a similar monthly income from a drawdown. Of course, it seems a gamble as you may die too soon. The main advantage is you know exactly what you will get with stock market fluctuations. Can i have some thoughts please?


  • artyboyartyboy Forumite
    388 Posts
    100 Posts Name Dropper
    It's up to you. 

    1) Take the certainty of the income that an annuity will give you (although why would you consider a 'fixed term' one as opposed to one that pays out till you die?)
    2) Take on the responsibility/risk of having a pension pot that you draw down from (I.e. 'DIY')
    3) Get an IFA to advise/manage that pension pot for you.

    All have pros and cons, but the attractiveness of drawdown over an annuity (to many) is that if managed well, you still end up with a pot of money when you die that can be passed on to your family with no IHT implications.
  • CipricoCiprico Forumite
    455 Posts
    Part of the Furniture 100 Posts
    .... You could buy a number of Gilts that mature for a fixed known amount every year so producing a fixed income  stretching out into the future... 

    Ie miss out the middleman and their costs. 

    I think that's more or less what annuity providers do... 

    Google bond ladders for more info
  • AlbermarleAlbermarle Forumite
    16.5K Posts
    10,000 Posts Fourth Anniversary Name Dropper
    Having a mix of annuities and drawdown is also an option, to cover all bases.
  • OldScientistOldScientist Forumite
    267 Posts
    100 Posts First Anniversary Name Dropper
    There are probably a number of questions to ask about the fixed term annuity:
    1) Is the payout nominal or RPI linked? Recent levels of inflation have reminded us that a 2% target is not necessarily achievable!
    2) What is the underlying interest rate? For example, a 20 year fixed term annuity aged 66 on moneyhelper currently gives about £7.5k per year (nominal) on a £100k premium with an implied underlying nominal interest rate of about 4.5% (for monthly payments in advance) which is somewhat better than current gilt yields.

    The difference between a fixed term annuity and a bond ladder is that the annuity includes the effects of mortality and the bond ladder doesn't (and is the reason why the effective interest rate on the 20 year fixed term annuity is higher). However, the bond ladder (if your pension provider allows you to buy individual gilts) does mean that the capital remains under your control.

    A lifetime annuity RPI linked currently pays out about £4.0k on a £100k premium (single life at 65) which is well above the historical 'safe' withdrawal rate for inflation-adjusted drawdown in the UK of 3.0% to 3.5%. Of course, the payout on a joint life annuity with 100% survivor benefits is somewhat less at about 3.3% (moneyhelper, both parties aged 65), but is still comparable with historical rates for drawdown.

    Of course, it is not necessary to choose one or the other since you can do both. For example, you could secure your essential spending using fixed term annuity, lifetime annuity, or bond ladder (as well as state pension and DB pension) and then use flexible (adhoc) amounts of drawdown to fund your discretionary expenditure (e.g. a fixed percentage of the remaining portfolio). 

  • MalthusianMalthusian Forumite
    10.3K Posts
    10,000 Posts Seventh Anniversary Name Dropper Photogenic
    What are you going to do with the pension fund when the annuity matures in 20 years?
    If the answer is "buy another fixed term annuity", why not just buy a lifetime annuity now?
    (I'm making the assumption that you're looking at fixed term annuities that return the original pot after 20 years, rather than one that returns nothing, otherwise it really does not compute.)
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