Could you explain to me what a temporary annuity is? I’m looking into buying an annuity for retirement and I’ve come across the term in my research. However, I’m a bit confused because I thought annuities were for life?
What’s a Fixed-Term Annuity?
A temporary annuity is an annuity that only pays out for a fixed term. You’re correct in that most annuities pay out an income for life — these are known as lifetime annuities and are the most common type of annuity sold today.
However, you also have the option to buy a temporary annuity, where you only secure a pension for a shorter period. When this term has passed, or the person who purchased the annuity (known as the annuitant) dies, payment stops.
When your term annuity ends, you’ll need to choose another source of retirement income.
Temporary annuities tend to offer a higher annuity rate than lifetime annuities because they’re paid for less time. This means you won’t necessarily have to use your entire pension pot to buy a retirement income.
You may favour a fixed term annuity if:
- You require a pension income today but aren’t ready to commit to a lifetime annuity
- You want more time to consider your retirement options
- You feel that lifetime annuity rates might rise in the future
- You want to see if there are any future changes to the retirement market / legislation.
A short-term annuity may not be best for you if:
- You want a flexible retirement income or you want an income that lasts for the rest of your life
- You feel lifetime annuity rates could be worse in the future
- You want to invest your income for growth over a fixed period.