Fixed Term Annuity
Written by
David
Reviewed by
Richard
Date
March 2025
What is a fixed term annuity?
Why consider a fixed term annuity?
What happens at the end of the term?
How much income will it provide?
Can this approach reduce tax liability?
What if I die before the term ends?
Does health affect fixed term annuity income?
Do I need to stay with my current pension provider?
What are the risks and benefits?
Next steps
What is a fixed term annuity?
A fixed term annuity is an alternative to a lifetime annuity, offering more flexibility for those who prefer not to commit their pension savings for life. It provides a guaranteed income for a specified period, with the potential to revisit income options at the end of the term.
As with other annuity types, you can normally take up to 25% of your pension pot as a tax-free lump sum. The remainder is used to generate a fixed income that’s unaffected by changes in markets or interest rates.
While the guarantee of income can be reassuring, it’s worth noting that a fixed term annuity doesn’t benefit from any future increases in annuity rates, interest rates, or market growth.
Some fixed term annuities also allow a portion of the fund to be set aside to grow at a pre-agreed rate, forming what’s known as the Guaranteed Maturity Amount (GMA). The less income taken during the term, the greater the GMA. In some cases, no income is taken during the term at all, allowing the entire fund (after tax-free cash is withdrawn) to grow at the agreed rate and maximise the GMA.
When the term ends, the GMA can be used in various ways, including:
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Purchasing a lifetime or another fixed term annuity
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Moving the fund into a drawdown arrangement
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Taking some or all of the value as a lump sum (subject to income tax)
Additional options often include:
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Choosing between a single or joint life policy
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Including death benefits
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Setting income to remain level or increase annually (either at a fixed rate or in line with inflation)
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Selecting a term ranging from 1 to 25 years (though 5–10 years is common)
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Selecting a payment frequency: monthly, quarterly, half-yearly, or annually
Several UK annuity providers offer fixed term annuities.
Why consider a fixed term annuity?
Greater flexibility A fixed term annuity can help maintain future income flexibility. Unlike a lifetime annuity, it allows individuals to reassess their options at the end of the term.
Access to a GMA without investment risk Rather than invest pension savings in drawdown, some may prefer the certainty of a fixed return. Key differences include:
- Fund growth at a fixed rate, rather than market-driven gains or losses
- No ongoing charges (costs are included in the annuity rate), whereas drawdown often includes several fees
- Greater protection: annuity funds are fully covered by the Financial Services Compensation Scheme (FSCS), while drawdown investments are generally protected only up to £85,000 per provider
Drawdown offers other benefits, so both options should be compared carefully.
Withdrawal flexibility Some providers, such as Legal & General, offer fixed term plans that allow limited withdrawals during the term. These options often involve administrative charges and affect the eventual GMA.
Bridging short-term income needs Fixed term annuities may suit individuals seeking income until other pension sources—such as the State Pension or a defined benefit scheme—become available.
Tax planning Spreading pension income across several tax years may reduce overall tax liabilities. Instead of drawing the full taxable amount in one year, a fixed term annuity can spread income more gradually. Further detail on this is provided below.
What happens at the end of the term?
When the term ends, the Guaranteed Maturity Amount (GMA) becomes available. This can be used to:
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Purchase another annuity (including enhanced options if health has changed)
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Move funds into drawdown
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Take part or all of the value as cash (subject to tax)
It’s important to note that the GMA might not be sufficient to meet income needs for the remainder of retirement.
How much income will it provide?
The income from a fixed term annuity depends on several factors:
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Size of the pension pot
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Your age and selected term
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Chosen annuity features (e.g., level vs escalating income)
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Rates offered by different providers (which can vary significantly)
Some providers or schemes may not offer fixed term annuities, making it important to explore the open market.
Can this approach reduce tax liability?
Like other annuity options, up to 25% of the pension fund can usually be taken tax-free. Any additional income is taxed as regular income under UK rules.
Those facing higher tax charges (e.g., 40% or 45%) might consider using a fixed term annuity to spread taxable income across multiple years. By doing so, they could remain within a lower tax bracket.
If death occurs before age 75, any death benefits are normally paid tax-free. If age 75 or older, they are taxed as income for the benefi
What if I die before the term ends?
Most fixed term annuities include in-built death benefits. Depending on the options selected:
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Income may continue to a joint policyholder or financial dependent for the remainder of the term
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The Guaranteed Maturity Amount may be paid to a beneficiary
Eligibility for a joint plan typically includes financial dependents aged 40 or above.
Does health affect fixed term annuity income?
Fixed term annuities do not offer enhanced income based on health or lifestyle factors. If you have qualifying health conditions or habits (e.g., smoking), an enhanced lifetime annuity may provide higher income.
That said, using a fixed term annuity now could enable access to an enhanced annuity later, particularly if your health deteriorates before the end of the term.
Do I need to stay with my current pension provider?
No. You are not required to purchase an annuity from your current pension provider. In fact, the Financial Conduct Authority has found that many individuals receive lower income by staying with their existing provider.
Using the Open Market Option allows you to compare offers from multiple providers. Because this process can be complex and time-consuming, many people choose to use a specialist broker or financial adviser.
What are the risks and benefits?
Risks:
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GMA may not stretch far enough for long-term retirement needs
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Future annuity rates could be less favourable at the end of the term
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Inflation may erode the value of fixed income
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Lack of access to investment growth
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Large withdrawals could limit future pension contributions
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Uncertainty about future tax treatment
Benefits:
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Certainty of income over a chosen term
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Predictable GMA without market risk
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Flexibility to reassess income strategy at the end of the term
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Potential to benefit from improved health or better rates later
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Can access tax-free cash without taking income
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Cost-effective death benefit options
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Some providers offer early exit or transfer flexibility (e.g., Legal & General, LV=)
A fixed term annuity may suit those seeking stability, flexibility, and control over their retirement income, especially if future circumstances are likely to change. As always, professional financial advice can help ensure the right decision for your personal situation.
Next steps
Want to see how much income you could really get?
Check the latest annuity rates or get a personalised quote now through Legal & General, Aviva, or use Retirement Line’s annuity calculator to get an up-to-date forecast — it only takes a minute to get started.
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