UK Retirees Turn to Fixed-Term Annuities to Bridge Pension Gap
Financial providers report surging demand for fixed-term annuities as savers seek guaranteed income before reaching state pension age.
At a glance
- UK providers are seeing higher demand for fixed-term annuities that pay regular income for a set period alongside a final lump sum.
- The products help retirees bridge the gap between their preferred retirement age and the state pension age, which reaches 67 in 2028.
- Higher annuity rates and upcoming inheritance tax changes on unused pension pots starting in April 2027 are helping drive interest.
Financial providers in the UK are reporting a surge in demand for fixed-term annuities as savers seek reliable income to bridge the gap between stopping work and claiming their state pension.
While the vast majority of annuity buyers historically choose lifetime policies that pay a guaranteed income until death, increasing numbers of individuals are opting for fixed-term alternatives. These products pay an agreed income over a specified timeframe, such as five or ten years, before returning a pre-agreed lump sum at the end of the term. Savers can then reassess their financial circumstances and choose their next steps.
Retirement specialists Standard Life and Canada Life have both reported notable increases in customer interest this year. Standard Life noted that 62 is the average age at which Britons would like to retire, whereas the UK state pension age is currently rising from 66 to 67 by April 2028. This creates an income gap of several years for early retirees.
To illustrate potential returns, Standard Life indicated that a 62-year-old with a £100,000 pension pot could currently secure a guaranteed annual income of around £13,800 for five years, followed by a £50,000 lump sum. That yearly income is higher than the full new state pension, which stands at £12,548 annually.
Industry figures note that fixed-term annuities allow retirees to pause before committing to a permanent lifetime product or taking on investment risk through pension drawdown. Interest has also been spurred by inheritance tax reforms announced in the 2024 autumn budget, which stipulate that unused defined contribution pension savings will no longer be exempt from inheritance tax starting in April 2027.
Despite growing sales, consumer confusion persists. A survey of 2,000 UK adults aged 50 and older by Legal & General found that 30% of respondents viewed annuities as too difficult to understand, while only 35% correctly identified a lifetime annuity as providing income for life.
Source: The Guardian Business.
Questions and answers
- What is a fixed-term annuity?
- A fixed-term annuity converts pension savings into guaranteed regular income for a set duration, such as five or ten years, and provides an agreed lump sum at the end.
- Why are fixed-term annuities growing in popularity?
- They offer financial certainty and help individuals fund the years between stopping work and reaching state pension age without locking into a lifetime commitment immediately.
- How will UK inheritance tax rules for pensions change?
- Starting in April 2027, unused savings in defined contribution pensions will no longer be exempt from inheritance tax if an estate exceeds the relevant threshold.
