The benefits and pitfalls of fixed term annuities
As the rates for lifetime annuities continue to fall – and are expected to drop even further when the regulations to introduce gender-neutral pricing come into force – individuals are considering fixed term annuities as a viable alternative.
These plans deliver a guaranteed capital sum for a short, fixed-term investment, which can then be used to buy another annuity, potentially a conventional one if gilt yields have improved and driven rates up.
While there are risks regarding the income received, fixed term annuities can be beneficial if individuals have or are likely to develop a medical condition that will enable them to apply for an enhanced annuity later on.
Furthermore, if it is the individual’s spouse that has a medical condition, they could benefit from using a fixed annuity if the spouse’s benefit is over 50 percent or if the spouse is materially younger.
Many such products now also contain break clauses, enabling individuals to switch if they develop a medical condition, change their marital status or lose their partner.