An annuity can be an appealing investment but for some people, the time restraints of a lifetime annuity can seem inflexible. If you’re looking for a shorter commitment, it could be worth considering a fixed-term (also called a short-term) annuity.
But how do you define a fixed-term annuity, and is it even right for you?
Like any financial decision, it’s important to do your research. After all, it’s your financial future and although fixed annuities can be a great investment, there is always a risk.
For the best advice, speak with a pensions expert before you buy a fixed annuity.
Read on for our fixed-term annuity guide. We’ll be looking at the following:
- What is a fixed-term annuity?
- Fixed annuities explained
- How do fixed annuities work?
- How does a fixed term annuity calculator work?
- What are the pros and cons?
- Are they a good or bad idea?
- What are the rates like?
- How to find the best rates
- Who are the best fixed annuity providers?
- Should I get fixed annuities insurance?
- Can I sell a fixed annuity?
- Should I defer my fixed annuity?
- Speak to an expert
It’s always advisable to seek professional advice, and the experts we work with can use their whole-of-market access to find the best fixed annuity rates. Call us on 0808 189 0463 or make an enquiry.
We’ll put you in touch with one of the experts we work with for free and you can have no-obligation chat about short-term annuities.
What is a fixed-term annuity investment?
A fixed annuity is a retirement product which pays an income for an agreed period of time. Most fixed annuity contracts provide payments for between 5-10 years, although there are some that last as long as 20 years. Because they are only set for a specified period of time, fixed annuities may be a more attractive investment opportunity.
After this period of time, the fixed annuity provider will pay out a lump sum which is referred to as the ‘maturity amount.’ It’s not uncommon for customers to use this fund to purchase another annuity product and some opt for a fixed-life annuity or lifetime annuity, which pays out until death.
That being said, you would also be free to withdraw or transfer your ‘maturity amount’ as a cash sum which could be used during your retirement.
Fixed annuities explained further
If you’re looking for an easy way of understanding how fixed-term annuities work, their primary function is providing an individual with regular payments over a set period. It’s an investment product that’s attractive because the risk is lower compared with a longer-term annuity plan, as it offers the security of a guaranteed rate of return.
The money that you invest in a fixed annuity will earn a fixed rate of return during this accumulation period, though bear in mind that if annuity rates fall during this fixed-term period, your maturity amount may be lower than you’d expect. See below for more information on how these rates work.
How do fixed annuities work?
When you sign a contract for a fixed-term annuity, you’re making an agreement that you will pay a lump sum in return for a guaranteed income.
As well as receiving regular fixed annuity payments, the money that is invested in the annuity is also guaranteed to earn a fixed rate of return.
This means that during the ‘annuitization phase’ (when money is being paid out), your remaining balance minus your regular payouts, will continue to grow at this fixed rate.
The rate you are offered on your fixed-rate annuity directly affects how much income you are paid as well as how much you receive as your maturity amount.
A key point to note is that you can opt to receive lower monthly payments as this could leave more money in your annuity account to accumulate interest. This could give you a larger maturity amount at the end of your contract.
What are fixed income annuities?
A fixed annuity is often referred to as a fixed income annuity because the income received from this type of retirement product is set or ‘fixed’, unlike variable annuities which don’t guarantee a secure rate.
How a fixed-term annuity calculator works
Upon signing your fixed-annuity agreement, your provider will offer you a range of options which each directly affect your final total as well as the amount that you receive as income.
These options may include death benefits, annuity protection and whether or not you receive regular payments or defer your income.
As a rule of thumb, the higher the income the lower the maturity amount. It can be a good idea to keep this in mind when deciding how much you would like to receive as guaranteed regular payments as opting for a higher amount could reduce your pension pot so much that you are unable to purchase another pension product,
Because there are a multitude of factors that can affect how much your maturity amount is at the end of your term, it’s always best to seek help.
The advisors we work with can carefully calculate your maturity amount, based on your circumstances and the current rates offered by the fixed-term annuity providers.
Chat to an expert to kickstart your calculations.
Short term annuity calculators
You might also find short term annuity calculator tools online, and while these can give you a rough idea of the investment’s potential, a better alternative is to speak to an actual human being instead.
The pensions experts we work with can provide you with bespoke calculations, taking every variable into account, and can offer context to the calculations. They will also introduce you to the best short term annuity provider based on the numbers the calculator tool returns.
What are the pros and cons of a fixed-rate annuity?
Fixed-term annuities can be financially beneficial for many customers but as with every financial product, there can also be risks.
- The income from a fixed-guaranteed annuity does not usually increase with inflation. If inflation were to increase and push up the cost of living, the guaranteed payout might not be enough to live comfortably on.
- Factors such as your life expectancy, health and list of medications can drastically affect the amount that you will be paid from your fixed-term annuity.
- If you are in good health and have a high life expectancy, you may find that your payments are lower in comparison to someone who has poor health or is perhaps older.
- Many agreements have terms and conditions that state that if you were to leave or withdraw your funds early, you could be charged fixed annuity fees or early exit fees.
- Fixed-rate annuities can help you to avoid locking into a long contract. Many fixed-term annuity customers enjoy the freedom of deciding how long their contact lasts.
- An annuity could provide peace of mind that comes with knowing that you have a guaranteed income for a set period of time.
- If annuity rates improve, the maturity amount that you receive at the end of your contract could be higher.
- Some fixed-term annuity products include death benefits which can be advantageous if you are looking for a product that will pay out to your beneficiaries in the event of you passing away.
- There are also providers that allow their customers to defer their fixed annuities and this could provide an opportunity for investors to increase their return by building interest.
Are they a good or bad idea?
Many of the fixed-term annuity products available in the UK can provide a secure and predictable income for retirees.
However, keep in mind that your own financial situation and circumstances can affect whether fixed annuities are a good investment.
For an in-depth comparison of fixed annuity products, send us a message and we’ll put you in touch with an expert who can offer you free, impartial advice about fixed annuities.
What are the rates like?
Average fixed annuity rates available in the UK can differ dramatically, making it difficult for people to compare quickly.
Another problem that many people face when searching is that their own circumstances can also heavily impact the rate they are offered.
Researching rates is important when comparing fixed-income annuity rates, but keep in mind that the rate advertised may not be the rate that you qualify for.
For a better indication of the average fixed annuity rates, contact an annuity advisor. They’ll be able find offers tailored to your circumstances.
How long does my fixed-term interest rate last for?
Short-term annuity rates are set at the start of your contract and, because they are fixed, they’re set for the longevity of your agreement.
How long that agreement lasts is up to you and your provider. Most fixed-rate annuity providers set their contracts with time periods ranging from one year fixed annuity rates to 10 year fixed annuity rates.
That being said, it may be possible, depending on your circumstances, to find an annuity provider that offers longer fixed-rate annuity periods with 20 year annuity rates.
Contact an advisor to learn more about annuity providers that offer the best short-term annuity options.
How to find the best fixed-term annuity rates
You may be interested in fixed-period annuity rates from a specific annuity provider, perhaps Prudential, Legal and General or Aviva, but these might not necessarily be able to offer you the top fixed annuity rates.
Try not to rule out other fixed-term annuity providers as these may be able to offer competitive rates and terms.
In fact, to find the best fixed annuity rates, you need a complete overview of all of the available options.
The advisors we work with have access to the current fixed annuity interest rates and using this information as well as their expertise, they can recommend the most financially beneficial option for you.
For a comprehensive list of fixed-rate annuity quotes, contact an annuity advisor.
Who are the best fixed annuity providers?
The list of fixed annuity providers in the UK is extensive and so deciding which one is the best for you can be time-consuming.
Fixed annuities aren’t always a ‘one size fits all’ product and the varying terms could mean that for one person, the annuity is perfect though for another, it might not fully meet expectations.
The experts we work with have a robust knowledge about the best fixed-rate annuities available in 2020 as well as their providers.
They will be able to identify the highest fixed annuity interest rates and can help you with your application if you wish to proceed.
To find the best fixed annuity companies for you based on your circumstances, ask an advisor.
Should I get fixed annuities insurance?
Although the contact period for a fixed annuity is somewhat more flexible and shorter than other annuity products, some customers opt for fixed annuities insurance to protect their finances in the event that they pass away.
Also known as capital protection, fixed annuity insurance can usually be added in to an agreement for an additional fee.
Additional fees can be frustrating but this could be outweighed by the added protection that fixed annuity insurance provides. Knowing that the capital from your annuity will be inherited by your beneficiaries as a tax free sum, can provide peace of mind, particularly if you are seeking to leave inheritance.
For advice on how to insure your annuity product, make an enquiry.
Can I sell a fixed annuity?
In some cases, it may be possible for you to sell your fixed annuities in return for a lump sum of cash.
It may also be possible for you to sell a portion of your annuities as this could allow you to gain access to immediate funds while also keeping annuities as an investment for your future.
Selling a fixed annuity can seem daunting but with the help of an annuities advisor who can take you through the process step by step, it doesn’t have to be.
Should I defer my fixed annuity?
A deferred fixed annuity could allow you to earn a modest rate of interest.
Unlike fixed immediate annuities that pay out an income no later than a year after an agreement is signed, a deferred fixed annuity does not pay out until the end of the agreement.
Doing this allows the money in your annuity account to accumulate interest which therefore increases your retirement fund.
Another factor to consider is that there is always a potential that future annuity rates increase which could provide you with an overall higher return.
With that being said, economical factors such as Brexit could impact the rates of deferred fixed annuities in a negative way, so the risk of losing money should also be carefully considered.
If you’re unsure about whether or not to defer your fixed annuities, speak to an expert who can explain the pros and cons and advise you on the best option for you.
Fixed-term deferred annuity calculators
It can be tempting to use deferred income annuity calculators but these don’t always provide accurate quotes, which can lead to confusion and delays.
For a fixed annuity quote that takes the finer details into consideration, contact an expert.
Using their knowledge and fixed deferred annuity formula, they can send you a quote and provide informed advice about what your next steps should be.
Speak to an advisor
Getting the right advice about where to invest your pension could be the difference between budgeting or enjoying your retirement funds.
Because the rules changed in April 2015 thanks to the Pension Freedoms act, you can now have full control over what happens to your pension once you turn 55, so as well as short-term annuities, it could also be beneficial to hear about the alternative products that could be available.
Contact an advisor by making an enquiry online or calling 0808 189 0463.