The sale of retirement annuities has risen sharply in recent years, as more people are looking for a way to bridge the gap between finishing work and receiving their pension.
Financial advisers have reported seeing a growing interest in an annuity, which turns a person’s pension into a regular, guaranteed income.
While the vast majority of people opt for a lifetime annuity, which provides an income for the remainder of their life, more people are now attracted to the “lesser-known” fixed-term annuity.
Under the conditions of a fixed-term annuity, a person can give them an income for a set number of years, before receiving a lump sum at the end.
Retirement specialist Standard Life told The Guardian this could see a 62-year-old with a £100,000 pension pot would get a guaranteed income for five years, and a £50,000 lump sum at the end.
Unlike a traditional lifetime annuity, it offers a degree of flexibility meaning the person is not locked in favour - once the set term ends, a person can re-evaluate their options.
According to research, 62 is the average age when people would like to retire.
As a result, a person could use a fixed-term annuity to fund the period, given that the state pension age has risen will rise to 67 in April 2028.
Under the typical conditions, a fixed-term annuity is usually available from the age of 55, with a minimum investment of around £10,000.
Nick Flynn at Canada Life says these types of products are resonating with retirees “because they solve real challenges, helping retirees buy time before committing to drawdown or purchasing a lifetime annuity”.
He adds: “Customers are choosing the product to bridge the gap to state pension or defined benefit pension start dates, help fund specific commitments such as mortgage payments or school fees, or stabilise income in the earlier years of retirement.”
The announcement by Rachel Reeves in the 2024 autumn budget to change the inheritance tax treatment of pensions has seen a surge of interest in the fixed-term annuity, given that “unused” pension savings can be taxed after death if they exceed the IHT threshold.
Unused funds are viewed as money in a pension pot that has not been used to claim an income.
However, the insurer Legal & General says it surveyed 2,000 UK adults over the age of 50 earlier this year, and found a number of confusions about annuities remained “widespread”.
For example, only 35 per cent of respondents correctly identified a lifetime annuity as the retirement option that guaranteed an income for life. Meanwhile, 30 per cent felt that annuities were too difficult to understand.
But L&G says: “Annuities are actually quite simple. They let you exchange some or all of your pension savings for a guaranteed income.”
However, it adds: “They are not right for everyone. Annuities generally cannot be changed once set up or cancelled after the cooling-off period.”
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