"As with lifetime annuities, fixed term plans also offer customers certainty over their income, something that they’re increasingly seeking amidst ongoing political unpredictability."
Attending the weekly bingo or walking on distant beaches in white linen shirts. The traditional views of retirement are far from the modern reality. Today, no two retirements are the same.
Later life has many phases – the ‘young old’, the ‘old old’ and those in-between. Early retirement can be full of big expenses like holidays, new kitchens and cars, but income needs can change in the later years from a less active retirement in someone’s 70s to facing challenges of care costs in their 80s and 90s.
For many clients in the early to mid-stages of retirement, fixed term annuities can be an ideal solution. In the early years, customers might be waiting for their State Pension or another source of income to kick in. Fixed term annuities can ‘top up’ their income until these extra funds are available. And with income needs likely to change between the different stages of retirement, fixed term annuities will also give individuals the opportunity to revisit their retirement income plans later on. More flexibility than a lifetime annuity but with the certainty of a regular income over a chosen period (between 3 and 40 years), can be an appealing combination. What’s more, with some fixed term plans customers can receive a lump sum, known as the maturity value, at the end of the term. This can be used for the customer’s retirement needs at that time.
One of the biggest benefits of fixed term annuities is that they can be tailored to suit customers’ differing needs. However, it’s important to remember that the options a customer chooses will change the level of income they get. Somewhat like drawdown, if a customer opts to take out a higher income each year, they’ll have a smaller amount in their retirement fund when the annuity term ends. Just as with a lifetime annuity, income is guaranteed, but the key difference between fixed term annuities and lifetime annuities is that a fixed term annuity doesn’t provide a guaranteed income for life. That means it’s important for customers to think ahead about how they plan to use their lump sum to avoid running out of money during retirement.
When a fixed term annuity matures, the customer has choices to make about what they want to do with the maturity value. They can choose to buy another annuity, opt to take the sum as cash, or invest it. Customers can also choose to arrange a death benefit which enables them to leave some of their retirement income to a loved one, too, should they die before the plan ends. This includes a guaranteed minimum payment period, where all the payments due to the customer within that time will continue to be paid to a beneficiary, such as a spouse, or the customer’s estate. However, in cases where this period is the same as the full term of the annuity, individuals can also guarantee their maturity value will go to a beneficiary as well. It’s possible to remove the guaranteed payment period altogether, which will give the customer a higher annuity income, but good advice is crucial here, as clients need to consider the fact that they won’t be leaving any payments to their loved ones should they pass away.
Depending on the options they choose when they take out their plan, some customers can also make up to three partial withdrawals of at least £5,000 each should they need access to additional money. These withdrawals are taken from the final maturity value, so income payments are not affected.
As with lifetime annuities, fixed term plans also offer customers certainty over their income, something that they’re increasingly seeking amidst ongoing political unpredictability. Individuals will know exactly what they’ll get when they receive their annuity payment, which makes annuities a suitable option for customers who want to plan ahead for future costs, or who want the peace of mind that their income won’t be hit by volatility in the financial markets. But remember, customers can’t change their mind about income or death benefits once the plan has started.
We think fixed term annuities have an important role to play when it comes to advisers selecting suitable retirement options for customers. They work best when included within a wider retirement income mix, alongside drawdown, lifetime annuities and lifetime mortgages, or as part of a phased later life income plan.
Turning pension savings into income can seem like a daunting task for many people who are nearing or in retirement, so the need for sound advice throughout the retirement planning process is essential. That’s why advisers are so important in helping to guide customers through all their different options. Good advice can help them to build a retirement income mix that matches their personal plans and enables them to live the retirement they’ve always wanted. In today’s retirement of the ‘young old’ and the ‘old old’, of changing income needs and retirement’s varied phases, fixed term annuities could be a worthy addition to that personalized retirement plan.
Source: EMMA BYRON | LEGAL & GENERAL RETAIL RETIREMENT