A little-known pension product could help thousands of savers retire years earlier – and even pay them more than they originally invested.
With the state pension age rising to 67, many Brits have resigned themselves to working longer. Yet research by investment firm Hargreaves Lansdown found that 16% of people still hope to retire before they turn 60.
Experts say that fixed-term annuities – a little-understood version of the traditional lifetime annuity – can provide a guaranteed income for a set number of years and then hand back a lump sum, sometimes larger than the amount originally paid in.
Under one example, a 60-year-old gives an insurer £500,000 to buy a fixed-term annuity paying an income of £11,937 a year for seven years. When the policy ends, they receive £587,737 back, making total returns worth £678,102.
That’s enough to cover a “bridge” between early retirement and receiving the state pension at 67 – and potentially leave savers better off.
Annuity rates have become far more appealing since interest rates rose from a record low of 0.1% in December 2021 to 5.25% by August 2023.
In May this year, average annuity rates hit 7.72%, up from 4.71% in July 2020 – a jump of 64%, according to Standard Life.
Marianna Hunt from Fidelity International said fixed-term annuities could suit those wanting to keep their options open.
She told the Times: “Some people are put off from taking out a lifetime annuity because they want to benefit from any future stock market growth. But, when a fixed-term annuity matures, you have your options open.”
She added: “Annuity rates are looking very attractive by historic standards. One of the reasons annuities have not been very popular in the past ten years or so is because rates have not been very appealing. However, there is no guarantee (these rates) will last.”
The income from an annuity is taxed in the same way as other earnings. Anything above the £12,570 personal allowance is taxed at 20% – and with that threshold frozen until at least 2028, inflation-linked rises could push many into paying tax.
Buyers also need to consider that inflation erodes the value of fixed payments over time. Some annuities offer inflation-linked or escalating payments, but these tend to come with less generous starting rates.
What happens if you die before the annuity term ends depends on your policy. The cheapest type offers no death benefits, meaning payments stop immediately and your family receives nothing.
Retirement and annuities expert William Burrows said: “People want to have their cake and eat it. They want a high level of income but want the flexibility that if they die, there is money back, or some kind of flexibility in the future.
« With fixed-term annuities, you still can’t have your cake and eat it, but it does give you some flexibility in the future.”
Experts say there’s no one-size-fits-all answer. Fixed-term annuities may appeal to those with a specific income gap to fill before state pension age, or those who want to limit exposure to stock market swings.
Government-backed services including Pension Wise and the Money and Pensions Service offer free, impartial guidance, including an online annuity calculator to help compare deals.
Marianna Hunt said today’s higher rates may offer “a window of opportunity” for those looking to lock in an income while keeping one eye on the future.
