Fixed-Term Annuity vs Conventional Annuity: A Detailed Comparison

A fixed-term annuity occupies an interesting middle ground in the retirement income spectrum. It provides the security and predictability of guaranteed income — like a conventional lifetime annuity — but for a defined period rather than for life. At the end of the term, a guaranteed maturity amount is returned to you, which you can then use to purchase a lifetime annuity, enter drawdown, or arrange another fixed-term product. For individuals who want income security now but wish to preserve future flexibility, it can be an attractive solution.

This guide compares fixed-term and conventional lifetime annuities in detail, covering structure, income levels, risk profile, tax treatment, death benefits, and the circumstances in which each is most suitable.

What is a conventional lifetime annuity?

A conventional lifetime annuity pays a guaranteed income for the rest of your life in exchange for a lump-sum premium. The purchase is permanent and irrevocable. Once purchased, the income level is fixed (for a level annuity) or increases at a predetermined rate (for an escalating annuity). The capital is consumed: there is no maturity value, and nothing passes to beneficiaries beyond any guarantee period or joint-life continuation.

What is a fixed-term annuity?

A fixed-term annuity (sometimes called a short-term annuity or temporary annuity) pays a guaranteed income for a fixed period — typically 3, 5, 10, or 15 years. At the end of the term, the provider pays a guaranteed maturity amount (GMA) back to you. The GMA is specified at outset; it represents the portion of the original premium that the insurer will return when the term ends.

The level of the GMA affects the income paid during the term: a higher GMA means less income during the term (more capital is being preserved for return); a lower GMA means more income but less capital returned.

Fixed-term annuities are classified as drawdown products for regulatory and tax purposes. This has an important implication: the money purchase annual allowance (MPAA) can be triggered depending on how the product is structured.

Key structural difference: reversibility

The most fundamental difference between the two products is that a conventional lifetime annuity is irreversible and final, while a fixed-term annuity preserves the option to make a different decision at the end of the term.

For someone who is hesitant to commit permanently to an annuity — perhaps because they believe interest rates will rise, because they are in uncertain health, or because their personal circumstances may change — the fixed-term option provides a defined window of security while deferring the permanent decision.

For someone who wants the maximum security of never running out of money, the conventional lifetime annuity provides this with certainty; a fixed-term annuity does not.

Income level comparison

For the same initial premium, a conventional lifetime annuity typically pays a higher initial income than a fixed-term annuity with a significant GMA. This is because the insurer retains the full premium in the lifetime annuity case and is not obliged to return any capital; in the fixed-term case, the insurer must reserve enough to pay the GMA at maturity.

However, a fixed-term annuity with a zero or very low GMA (known as an "enhanced" or "high income" fixed-term annuity) can pay income comparable to, or even slightly above, lifetime annuity rates for the term — because the insurer is effectively consuming the capital over the period, much as a lifetime annuity does.

At mid-2026 rates, a 65-year-old with £100,000 might receive approximately:

• Conventional single-life level lifetime annuity: ~£6,500–£7,000 per year for life
• 10-year fixed-term annuity with 80% GMA: ~£4,500–£5,000 per year for 10 years, with ~£80,000 returned at maturity
• 10-year fixed-term annuity with 50% GMA: ~£6,000–£6,500 per year for 10 years, with ~£50,000 returned at maturity

These figures are illustrative and vary by provider and market conditions.

Longevity risk comparison

A conventional lifetime annuity fully eliminates longevity risk: the income is paid no matter how long you live.

A fixed-term annuity eliminates longevity risk only for the period of the term. At the end of the term, you must make another decision about income. If annuity rates have fallen materially by that point, or if your health has deteriorated in a way that complicates your choices, you may be in a worse position than if you had committed to a lifetime annuity at outset.

Conversely, if you die during the term, the GMA typically passes to your estate — a potentially significant advantage over a conventional lifetime annuity with no guarantee period, which would pay nothing.

Death benefits

During the fixed term: If you die, the GMA is typically returned to your estate or nominated beneficiaries. If death occurs before age 75, this is paid tax-free (subject to the lump sum and death benefit allowance). If death occurs after age 75, it is taxable as income in the beneficiaries' hands.

Conventional lifetime annuity: Death benefits depend on the terms purchased. A level annuity with no guarantee period pays nothing after death. A 10-year guarantee pays the remaining guaranteed instalments. A joint-life annuity continues to pay the surviving spouse.

For individuals who are concerned about their estate and who have limited life expectancy, the GMA feature of fixed-term annuities can be materially more valuable than the equivalent conventional annuity terms.

The MPAA issue

Taking income from a flexi-access drawdown arrangement — including a fixed-term annuity classified as drawdown — triggers the MPAA, restricting future money-purchase pension contributions to £10,000 gross per year. This is the same trigger as flexi-access drawdown income withdrawals.

If you are still making pension contributions (for example, still working part-time), taking income from a fixed-term annuity will trigger the MPAA. A conventional lifetime annuity does not trigger the MPAA, because it is a purchase rather than an income drawdown arrangement.

This distinction can be significant for individuals still in employment.

Waiting for better rates

One of the most common reasons individuals choose a fixed-term annuity is the expectation that lifetime annuity rates will improve by the end of the term. If gilt yields rise further, rates available at the end of the term may be more attractive than those available today.

This strategy has some logic in a rising yield environment but involves genuine risk. Rates are not guaranteed to rise; they may fall. The comparison must also factor in the investment return on the GMA during the term: simply holding the GMA as cash for 10 years and then purchasing a lifetime annuity may or may not produce a better outcome than buying the lifetime annuity today.

Tax treatment

Income from both fixed-term and conventional lifetime annuities is taxable as non-savings income in the year it is received. The provider deducts tax under PAYE using the tax code held. The tax treatment is broadly equivalent.

The GMA paid at maturity of a fixed-term annuity is a capital return, not income, and is therefore not itself taxable as income at the point of return. However, any future income purchased with the GMA will be taxable.

Suitability: when to consider a fixed-term annuity

A fixed-term annuity may be worth considering if:

• You want guaranteed income for a specific period (for example, until a DB pension commences, or until full state pension age)
• You are uncertain about committing permanently to an annuity and want to defer the decision while maintaining income security
• You have a shorter life expectancy and the guaranteed death benefit is important
• You believe lifetime annuity rates will improve materially and want to defer purchase
• You want to bridge a specific financial gap (school fees, mortgage payoff) with guaranteed income

A fixed-term annuity is less suitable if:

• Your primary concern is eliminating longevity risk permanently
• You are not MPAA-sensitive and have no particular need for capital return at the term end
• You are confident in your preferred long-term income arrangement and simply want to implement it

Regulated advice is essential

The choice between fixed-term and conventional annuities involves actuarial complexity, tax considerations, and significant long-term financial consequences. Rates and GMA terms vary considerably between providers, and health underwriting may improve the available rates in both product categories. This guide is for educational purposes only and does not constitute personal financial advice. Seek regulated financial advice before purchasing any annuity product.

How Global Investments Can Help

Global Investments has access to the full range of annuity products available in the UK market, including fixed-term and conventional lifetime annuities from multiple providers. Our advisers can model the financial outcomes of different strategies, compare terms on a like-for-like basis, and help you decide whether a fixed-term or lifetime annuity — or a blend of approaches — is right for your circumstances. Contact our retirement income team to arrange a comparison review.