Pension and life insurance companies are reporting a major uptick in demand for fixed-term annuities since the coronavirus outbreak started, with the number of applications almost four times higher in May than at the beginning of the year.
The increased interest is from people who are concerned about the uncertainty COVID-19 has created, as well as the ensuing stock market volatility.
The coronavirus outbreak and volatility in investment markets is worrying many savers who are approaching retirement or drawing an income from their pension fund. They are looking for a safe place to park their money and ensure a secure income.
Additionally, cash deposit returns are at an all-time low and policyholders want a better return while retaining certainty of outcome.
A fixed-term annuity provides a regular retirement income for a number of years, often five or 10, as well as a maturity amount at the end of the specified period. Savers can then use the maturity amount to invest in another retirement income product, such as another fixed-term annuity or a lifetime annuity, or they can take money out of their pension.
How they work
When buying a fixed-term annuity, you choose:
- The term, which is usually between three and 20 years.
- Annuity options, such as single or joint, fixed or increasing income (much the same way as when buying a lifetime annuity.)
- Whether you want the annuity to deliver a guaranteed or an investment-linked income.
With a fixed-term annuity paying a guaranteed income, you can also choose the level of the income and the maturity amount you’ll need to invest at the end of the term.
The higher the income you choose, the lower the maturity amount will be.
The main risk with fixed-term annuities is that changes in market conditions could mean the maturity amount you receive at the end of the fixed-term period isn’t enough to provide you with the retirement income you need. This might be because annuity rates have fallen during the fixed-term period.
However, it’s also possible that the retirement income you could receive at the end of the fixed term is higher, perhaps because annuity rates have improved, or your health has deteriorated so you’re then eligible for an enhanced annuity.
The main benefit of a fixed-term annuity is that it allows you to keep your options open and, when the term ends, you can shop around again for whatever type of pension product and features match your circumstances at that time.