Quick Guide To How A Fixed Term Pension Annuity Works
This is a new popular type of pension annuity product introduced to the UK in 2006. It is designed to give clients income certainty up to a maximum age of 75 (currently) but without tying you in to one product for the rest of your life. This enables you to adjust your retirement benefits at the end of each term, which is selected by you.
These plans run for a fixed period of time (usually five years or more), during which time you will receive a guaranteed level of income within certain limits set by the Government. At the end of the specified term you will receive a guaranteed maturity lump sum, which enables you to re-evaluate your options and purchase another retirement income product, either for life or for another fixed period of time.
Currently, you can continue to do this until you reach the age of 75, at which time you then purchase a pension annuity for the rest of your life.
Important, if your health or personal circumstances have changed, at the end of the plan term, it may be possible to purchase a pension annuity that reflects your new situation. Your income may be higher or lower than it was before depending upon the options you choose at that time and on prevailing pension annuity rates.
Advantages and Disadvantages of a Fixed Term Pension Annuity
>> Fixed Term pension annuities offer clients a range of advantages over conventional retirement income options.
>> The main advantage is that this type of product does not tie you in to one product or one shape of income for the rest of your life. At the end of the fixed term, you are free to reinvest your maturity lump sum in whatever appropriate pension annuity product best suits your needs at that time. This is especially useful if:
>> Pension annuity rates have gone up since taking the Plan as you should be able to secure a higher income as a result.
>> Your health has deteriorated over time, as you may qualify for enhanced or impaired pension annuity rates something that you wouldnt have been able to get at the beginning of the plan when you were in better health.
>> Your spouse or partner has died. If your plan was set up on a joint life basis, you will now be able to use the maturity lump sum to secure an income on single life terms which will provide a higher rate of income for you.
>> Your income needs have changed. For example, if you have inherited wealth from elderly parents you may no longer have a need for all the income you were receiving from your Fixed Term pension annuity and so you could choose a plan with a lower level of income to suit your changed financial circumstances.
The main disadvantage of this type of Plan is that, unlike a Lifetime pension annuity, you cannot be certain what your income level will be at the end of the fixed term. While the income is guaranteed for the term of the plan (subject to Government limits), the income you receive once you reinvest the maturity lump sum will depend on prevailing pension annuity rates at that time (if you choose a pension annuity option). Pension annuity rates can go up and down, so the income you receive at the end of the plan term may be lower than if you had bought a Lifetime pension annuity instead.
Another thing to bear in mind is that, while the plan gives you the flexibility to take
a higher level of income at outset than you would normally get from a Lifetime
Annuity, the effect of doing this will be to reduce the maturity lump sum you receive at the end of the term. This in turn means that you are unlikely to be able to maintain that level of income beyond the end of the plan term. There is also a higher risk that your income level will be restricted if Government limits relating to the maximum income allowable under this type of contract are reduced, although any income that cannot be paid as a result of such a restriction will be added to your maturity lump sum.
Find out more about how fixed term pension annuity can benefit your retirement lifestyle.