By Giliker Flynn – Family-run independent financial advisers, helping families build secure and flexible retirement plans.
What Is a Fixed-Term Annuity?
A fixed-term annuity is a retirement income product that lets you:
Use part or all of your pension pot to buy an annuity
Receive a guaranteed income for a fixed number of years
Receive a maturity amount at the end of the term, which can be used to buy another annuity, move into drawdown, or access as a lump sum (subject to tax rules)
Unlike a lifetime annuity, which pays out for the rest of your life, a fixed-term annuity gives you income for a defined period and flexibility at maturity.
For many people, it’s a middle-ground option between locking in for life and staying fully invested.
How a Fixed-Term Annuity Works in Practice
You choose the term – typically between 3 and 20 years.
You decide the income level – which determines how much is left at the end.
You receive a guaranteed regular payment for the term.
At the end, you get a guaranteed maturity value (GMV) or residual fund value.
You can use the GMV to:
Buy another fixed-term or lifetime annuity
Transfer into drawdown
Take further cash (subject to tax rules)
Because of this structure, a fixed-term annuity can evolve with your needs as retirement progresses.
Why People Choose Fixed-Term Annuities
1. Flexibility
You can lock in income for a period without giving up access to your entire pot forever.
2. Bridging Periods
Many use fixed-term annuities to bridge the gap between early retirement and:
The State Pension age
Another income source
Deciding on a lifetime annuity later
3. Rising Annuity Rates
If annuity rates are expected to rise (e.g. due to higher interest rates), a fixed-term product lets you wait and buy later at a potentially better rate.
4. Certainty in Uncertain Times
Guaranteed income can bring peace of mind, especially in volatile markets.
Key Features of Fixed-Term Annuities
Guaranteed income for the chosen term.
Guaranteed maturity value (depending on product and income level chosen).
Terms typically range from 3 to 20 years.
Options to add:
Escalation (income rising each year)
Joint life cover
Guarantee periods
Taxed as pension income at your marginal rate.
Some products allow you to take the 25% tax-free lump sum upfront, then use the remainder to buy the annuity.
How They Differ from Lifetime Annuities
FeatureFixed-Term AnnuityLifetime AnnuityPayment durationFixed number of yearsFor lifeMaturity valueYes, usually guaranteedNoFlexibilityHigh at end of termNone (usually irreversible)Income securityGuaranteed for the termGuaranteed for lifeExposure to ratesYou can switch laterLocked in at purchaseInheritanceMaturity value can be passed on (depending)Typically more limited
Fixed-term annuities offer a balance between security and flexibility, making them a popular option for people not ready to commit to a lifetime annuity.
Factors That Affect Fixed-Term Annuity Rates
Just like other annuities, rates are influenced by:
Interest rates and gilt yields — higher yields = better annuity rates.
Term length — longer terms typically pay more, but lock funds in longer.
Age and health — older age or health issues can increase income rates.
Escalation and options — inflation protection reduces starting income.
Market conditions at purchase.
Because interest rates fluctuate, fixed-term annuities can sometimes offer higher income now or a larger maturity value later, depending on how you structure the deal.
Pros of a Fixed-Term Annuity
Guaranteed income for a set period.
Flexibility to change strategy later.
Lower risk than drawdown during volatile market periods.
Potential to benefit from future higher annuity rates.
Can bridge income gaps (e.g. until State Pension age).
Often easier to understand than drawdown for some retirees.
Cons and Risks
No investment growth — your pot doesn’t grow during the term.
Income is fixed (unless you pay for escalation).
Inflation risk — rising prices can erode the real value of fixed payments.
Limited access to capital during the term.
Maturity value depends on product structure and chosen income level.
If rates fall, you might get less at maturity than expected (if not guaranteed).
This is why understanding the GMV and product terms is absolutely critical.
How Fixed-Term Annuities Fit Into a Retirement Plan
Fixed-term annuities are rarely used in isolation. They work best as part of a blended retirement strategy.
Examples:
Bridging strategy: Buy a 7-year fixed-term annuity at 60 to cover income until 67 (State Pension age).
Rate-timing strategy: Use a fixed term to delay locking into a lifetime annuity until rates improve.
Hybrid strategy: Combine a fixed-term annuity for stable income with drawdown for flexibility.
How the 2027 Inheritance Tax Changes Factor In
From April 2027, unused pension pots will be included in your estate for inheritance tax.
Funds used to buy an annuity are no longer part of your pension pot.
This can reduce the value of your taxable estate, depending on how income is used.
A fixed-term annuity gives you flexibility to plan around this while still drawing a guaranteed income.
This makes fixed-term annuities an interesting option for those balancing retirement income with estate planning.
Tax Considerations
25% tax-free lump sum typically available on crystallisation.
Income payments are taxed as pension income at your marginal rate.
Depending on how you structure withdrawals, this can help smooth your tax liabilities over multiple years.
Phased annuitisation (buying smaller fixed-term annuities over time) can also be used as a tax planning strategy.
Case Studies
Case Study 1 — Bridging to State Pension Age
Clive, 60, wants to retire but won’t receive his State Pension until 67.
He uses £200,000 to buy a 7-year fixed-term annuity paying £20,000 a year.
He keeps the rest invested in drawdown.
At 67, he plans to use the maturity value to buy a lifetime annuity.
Guaranteed income for 7 years
Flexibility preserved at maturity
Lower IHT exposure on pension pot
Case Study 2 — Waiting for Better Rates
Annette, 62, is cautious about locking in a lifetime annuity now.
She uses £150,000 to buy a 5-year fixed-term annuity.
If annuity rates rise as expected, she can buy a better lifetime annuity later.
If not, she can consider other options at 67.
Case Study 3 — Tax Management
David, 58, uses a fixed-term annuity to smooth income during semi-retirement.
He structures payments to keep his total income below the higher rate tax threshold, avoiding a big tax hit and preserving tax allowances.
Common Mistakes to Avoid
Not understanding the maturity value or assuming it will be larger than guaranteed.
Locking in for too long without flexibility.
Ignoring inflation protection and how it impacts real income.
Buying a product without comparing rates across providers.
Overlooking the role of tax planning in timing the purchase.
Our View at Giliker Flynn
A fixed-term annuity can be a powerful, flexible tool when used strategically:
It provides certainty of income without permanent commitment.
It can bridge income gaps or buy time for better rates.
It can play a role in tax planning and estate planning, especially ahead of the 2027 IHT changes.
But it’s not a one-size-fits-all solution. Understanding the product structure — particularly the maturity value — is key to making a smart decision.
Practical Next Steps
Assess your income needs and retirement timeline.
Decide on the right term length to match your goals.
Get multiple quotes from annuity providers to secure the best rate.
Understand the maturity value and your options at the end of the term.
Consider tax and IHT implications in your wider plan.
Work with a regulated adviser to ensure the product fits your strategy.
Conclusion
Fixed-term annuities offer a bridge between flexibility and certainty.
They provide guaranteed income for a defined period.
They leave you with options at maturity — unlike lifetime annuities.
When combined with drawdown or other assets, they can create a resilient, tax-efficient retirement income plan.
Used wisely, they can help you enjoy income now while keeping future choices open.
Important: Tax and pension rules can change, and their value depends on your circumstances. Always seek regulated financial advice before making decisions.
Giliker Flynn is a family-run, independent financial advice firm helping people across the UK design secure, flexible, and tax-efficient retirement income strategies.