What Is a Fixed-Term Annuity?
A fixed-term annuity (sometimes called a guaranteed fixed-term annuity or investment-guaranteed annuity) provides guaranteed income for a pre-agreed period, typically between 3 and 10 years. Unlike a lifetime annuity, which pays until death, a fixed-term annuity has a defined end date, at which point you receive a guaranteed maturity amount.
This structure gives you the certainty of guaranteed income for a specific period while preserving your ability to make a different choice when the term expires. It sits somewhere between the permanence of a lifetime annuity and the flexibility of pension drawdown.
How Fixed-Term Annuities Work
When you purchase a fixed-term annuity, you choose three main parameters:
- The term length: How many years of guaranteed income you want (typically 3, 5, or 10 years)
- The income level: How much guaranteed income you want each year during the term
- The maturity value: The guaranteed lump sum you receive when the term ends
There is a trade-off between income and maturity value. The higher the income you take during the term, the lower the maturity value at the end, and vice versa. You can even choose a zero maturity value (taking all the value as income) or a 100% maturity value (preserving all your capital and taking minimal income).
Example: How the Numbers Work
| Scenario | Investment | Term | Annual Income | Maturity Value |
|---|---|---|---|---|
| High income, low maturity | £100,000 | 5 years | ~£7,500 | ~£65,000 |
| Balanced | £100,000 | 5 years | ~£5,000 | ~£80,000 |
| Low income, high maturity | £100,000 | 5 years | ~£2,500 | ~£95,000 |
| Income only | £100,000 | 5 years | ~£21,500 | £0 |
| Capital preservation | £100,000 | 5 years | ~£500 | ~£100,000 |
Indicative figures for a 60-year-old in 2026. Actual rates vary by provider and market conditions.
Fixed-Term vs Lifetime Annuity
| Feature | Fixed-Term Annuity | Lifetime Annuity |
|---|---|---|
| Income duration | Set period (3-10 years) | Lifetime (until death) |
| Maturity value | Guaranteed lump sum at end | None (income stops at death) |
| Flexibility at end | Full choice: new annuity, drawdown, or cash | No flexibility (irreversible) |
| Income level | Lower (capital partly preserved) | Higher (no capital return) |
| Longevity protection | None (term ends regardless) | Full (pays until death) |
| Death benefit | Remaining income + maturity value | Depends on options chosen |
When a Fixed-Term Annuity Makes Sense
Bridging to State Pension
If you retire at 58 but your State Pension does not start until 67, a fixed-term annuity can provide guaranteed income for 9 years to bridge the gap. When the State Pension kicks in, you can reassess your needs with the maturity value.
Waiting for better lifetime rates
Annuity rates improve significantly with age. A fixed-term annuity lets you secure income now while deferring the lifetime annuity purchase to age 70 or 75 when rates are substantially higher. Read our guide on the best time to buy an annuity for more on this strategy.
Uncertain about retirement plans
If you are newly retired and unsure about your spending needs, a fixed-term annuity provides income while you figure out your long-term requirements without making an irreversible decision.
Tax Treatment
Fixed-term annuity income is taxed the same way as any other pension income:
- Income payments are subject to income tax at your marginal rate through PAYE
- You can still take 25% of the amount used to buy the annuity as tax-free cash (your pension commencement lump sum)
- The maturity value is not taxed when received — it remains part of your pension pot
- On death, remaining income payments and the maturity value are paid to beneficiaries subject to income tax
What Happens at Maturity
When your fixed-term annuity matures, you receive the guaranteed maturity amount and have complete freedom over what to do next:
- Buy a lifetime annuity: Use the maturity value to buy a permanent annuity, benefiting from older age and potentially better rates
- Buy another fixed-term annuity: Continue with guaranteed income for another set period
- Move into drawdown: Transfer the maturity value into pension drawdown for flexible withdrawals
- Take as cash: Withdraw the maturity value as a lump sum (25% tax-free, remainder taxed as income)
- Combination: Split the maturity value between multiple options
Choosing the Right Term Length
The optimal term length depends on your situation:
- 3 years: Maximum flexibility, ideal if you expect circumstances to change soon or want to reassess frequently
- 5 years: The most popular choice, balancing income certainty with regular review opportunities
- 7-10 years: Suits bridging strategies (e.g., to State Pension age) or those wanting longer-term certainty
Risks and Considerations
- No longevity protection: Unlike a lifetime annuity, a fixed-term annuity does not guarantee income for life
- Reinvestment risk: When the term ends, rates may be lower, reducing the income you can achieve next time
- No early access: You cannot withdraw or change the terms during the fixed period
- Provider solvency: Your guaranteed income depends on the insurance company remaining solvent (protected by the FSCS up to 100%)
- Inflation erosion: Fixed income loses purchasing power over time if inflation is high
Next Steps
Fixed-term annuities can be an excellent tool within a broader retirement income strategy, especially for bridging gaps or deferring lifetime annuity decisions. Compare quotes from multiple providers, consider how the fixed-term fits with your other income sources, and speak to a pension adviser to determine whether a fixed-term annuity, lifetime annuity, or blended approach best suits your needs.