What are Short Term Annuities?
Short term annuities, also known as temporary annuities involve you making an agreement with your chosen insurance provider for them to provide you with a guaranteed income over a fixed period. This is normally five years, with the minimum being three years. You can take a short term annuity as an escalating annuity, RPI annuity or a standard level annuity.
Short term annuities provide flexibility for those who do not wish to commit to a lifetime annuity but who still need to draw an income from their pension fund. If you want to take the chance that annuity rates will improve in the future then this maybe a suitable option in retirement. Rates for annuities are currently at a record low so they could well improve in five years time if the economy improves and interest rates have risen. Another point to consider is that your own personal circumstances may also change in the future. If you are a younger retiree e/g 50 – 64 and are in good health, level annuity rates offer a poor return from your pension fund. However your health may change as you get older meaning you could qualify for an enhanced annuity in 5 or 10 years time. Finally you may not want to take the risk associated with income drawdown which relies on the performance of investments to determine your future income level.
On the other side of the coin, some argue that short term annuities are themselves a ‘risk’. Below we have outlined the counter arguments to buying a short term annuity..
- Your health may not deteriorate
- Annuity rates could fall not rise
- Legislation could further drive rates down
- Government could change the rules relating to annuities and taxation
- Your income level is not guaranteed for life as with life annuities
However consider that one of the most prominent short term annuity providers estimates that over half of those who reach 75 have some form of medical impairment. Most annuitants are eligible for some form of enhancement on their annuity (although most don’t realise this) but this number will rise sharply for older retirees.