A fixed term annuity buys a guaranteed income for a chosen number of years rather than for life. At the end of the term it typically pays out a maturity value, which can then be used to buy another annuity, moved into drawdown or taken as cash. It sits between a lifetime annuity and drawdown and borrows something from each.
What it guarantees and what it does not
Within the term the income is contractually certain, so it removes investment risk for that period in the same way a lifetime annuity does. What it does not remove is longevity risk, because the payments stop on the end date whether or not you do. The maturity value is usually known at outset as well, which means the whole arrangement is defined in advance: you know what arrives each year and what is left at the end, and neither depends on markets.
Why anyone chooses a term rather than life
Chiefly to avoid committing permanently at one moment's rates. Somebody who wants certainty now but expects circumstances to change, perhaps because a state pension starts in a few years, a property is to be sold, or health may alter what a lifetime annuity would pay, can secure income for the interim and decide again later. It also keeps a capital sum in play, which a lifetime annuity does not, and that matters where leaving something behind is a priority.
The risk that replaces the ones it removes
You are exposed to what rates look like at maturity. If long term yields have fallen by then, the maturity value buys less income than the same money would buy today, and that is a real risk rather than a theoretical one over a ten or fifteen year term. A fixed term annuity therefore does not remove the timing problem; it postpones it and divides it, which is helpful if you think rates may improve and unhelpful if they do not.
What this site will not tell you
Whether a fixed term is preferable to a lifetime annuity or to drawdown depends on your other income, your health, your view of your own longevity and what you want to leave, none of which this site holds. That is a personal recommendation and a regulated activity. This page sets out the mechanics; where you want advice on your own position, the enquiry goes to a firm authorised to give it.
Questions people ask about fixed term annuity
What happens at the end of the term?
Most plans pay a maturity value that is known at outset. It can then be used to buy another annuity, moved into drawdown, or taken as cash subject to tax. The choice is made again at that point with whatever rates then apply.
Is a fixed term annuity safer than drawdown?
Within the term it removes investment risk, which drawdown does not, so the income is certain. It does not remove longevity risk, because payments end on the date whether or not you do, and it exposes you to rates at maturity.
Can I change my mind during the term?
Generally not without cost, since the guarantee is what you have bought. Some plans allow early surrender at a value that reflects the remaining term, but treating it as a flexible arrangement misunderstands the product.
Who does a fixed term suit?
Typically somebody who wants certainty now but expects a change in the next several years, such as a state pension starting, a property sale or a health change, and who does not want to commit capital permanently at today's rates.