Fixed Term Income Plans
Also known as ‘fixed term annuities’ these are plans which pay a guaranteed income for a specific period of time and at the end of the term there is a guaranteed amount paid pack into the plan.
Fixed term income plans are a type of drawdown plan which means that income payments are paid directly from the pension fund and the amount of the fund left over after making these payments is paid back to your pension plan
Just as with all other options, you can normally take a 25% tax free cash sum from your pension pot before the fixed term plan begins.
There is an importance difference between a fixed term and drawdown plan. With a drawdown plan you decide how much income is paid but neither the income or remaining fund value can be guaranteed. Whereas with a fixed income plan both the amount of income and the remaining fund value are guaranteed.
There is of course a trade-off between risk and returns; the risk with drawdown is that both the level of income and value of the pension fund can go up or down but there is more flexibility and the opportunity for fund growth. With fixed term plans, both income and fund are guaranteed but there is limited flexibility and no further fund growth.
The key to understanding fixed term income plans to know about:
- The amount of income
- The guaranteed maturity amount
- What happens on death
- How they fit into your retirement plan
The amount of income
You can choose the amount of income from any level to zero upwards. The more income you take the less will be paid as a guaranteed maturity value.
Most people select a level income but is possible for payments to increase each year
You will pay tax on your income payments at your marginal rate and tax will be normally deducted by the plan provider.
The guaranteed maturity amount
The amount paid out at the end of the plan is shown on the initial quotation and is guaranteed and paid back into the plan.
It is important to remember that this amount is not paid to you personally, but paid back into your pension plan. This means that you have to decide how what to with your pension pot again. There are three options:
- Take a cash sum – this will be taxed at your marginal rate
- Purchase a lifetime annuity
- Invest in another fixed term or drawdown plan
What happens on death
These depends on the options chosen and there are normally three options:
- Income can continue to your spouse or partner. You can choose a percentage of the initial income that will be paid; normally 50% or 2/3rds. If they survive to the end of the plan the guaranteed maturity is paid. If they die before the end of the term there is no maturity value.
- Payments can be guaranteed for a set period e.g. 5 years. If the guaranteed period is the same as the full term of the plan, this will guarantee that the maturity value is paid too.
- Value protection – the value of the original plan less payments already made
Not all providers offer all of these options.
Generally speaking, once the plan is set up the options cannot be changed. However, some providers do allow you to cancel the plan under certain conditions and transfer your remaining pot to another pension plan.
How they fit into your retirement plan
Fixed term income plans can help you meet a number of your retirement objectives. They are particular useful, as the term implies, for those looking to secure a guaranteed income for a fixed period. The other uses include:
- To help bridge a gap – e.g. between early retirement and payment of state or company pension
- In the expectation that annuity rates might increase or you will qualify for an enhanced annuity in the future – be careful with this because there is no guarantee that you will get a higher income in the future
- Reducing the risk of drawdown – if you invest part of your drawdown in a fixed term you will reduce the overall risk but you will also limit your flexibility and opportunity for fund growth
- As part of a combination of options – this is called a blended or hybrid solution where you can invest in a combination of annuities and drawdown in one single plan.
- Cash out plan – If the income limit is set so that the guaranteed maturity value is zero, you can arrange for your pension pot to be paid as cash over a set number of years
Learn more about fixed term and compare different providers by going to the marketplace. You can look but not buy!
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