New Fixed Term Annuities from Aviva & Just Retirement

Posted by: Billy Burrows, on 05/07/2011, in category "Archive"
Views: this article has been read 73244 times

Introduction

Aviva and Just Retirement launched their Fixed Term Annuities recently thereby adding more choice in this sector of the market. Previously only Met Life (Living Time) and LV= offered Fixed Term.

Fixed Term Annuities

Aviva and Just Retirement launched their Fixed Term Annuities recently thereby adding more choice in this sector of the market. Previously only Met Life (Living Time) and LV= offered Fixed Term.

What is a Fixed Term Annuity?

A Fixed Term Annuity (FTA) is a drawdown plan which provides guaranteed income payments for a set number of years and the end of the term there will be a lump sum payout which must be reinvested in, another FTA, a lifetime annuity or a drawdown plan.

Most FTAs provide a guaranteed maturity value but the new Aviva FTA has the option lump sum payout linked to equity returns.

The advantages

The main advantage of a Fixed Term Annuity is that if future circumstances change the investor has the flexibility to choose another type of annuity when the plan reaches maturity. For example if their health deteriorates they may qualify for an enhanced annuity therefore securing a higher income.

The disadvantages

If annuity rates are lower when the fixed term annuity matures, it may not be possible to secure the same of amount income if the maturity lump sum is used to purchase a another type of annuity.

Aviva’s Fixed Term Annuities

Aviva offers a choice or combination of a guaranteed maturity value and a guaranteed fund. These options might sound similar but they are very different. The guaranteed maturity value pays out a predetermined lump sum at the end of the policy term e.g. 5 years. The guaranteed fund is invested in a mixture shares, property, cash and corporate bonds and if the value of these investments has increased over the term of the plan there will be a bigger payout at maturity. The minimum payout will be the amount initially invested in guaranteed fund at the outset.

See an example of Aviva's Fixed Term annuity

On death the investor would receive the value of the income portion less any income payments made and the amount initially invested in the Guaranteed Maturity Value or and the current value of the Guaranteed Fund less any tax payable. Currently the tax charge is 35%.

Just Retirement

This policy is similar to other fixed term annuities except there is an option to convert to an enhanced lifetime annuity with Just Retirement if the investor’s health has deteriorated.

For example if the policyholder was diagnosed with a serious illness before the maturity date of the plan they could apply to convert this to a enhanced annuity payable for life.

Conclusion

Fixed term annuities have gained a toe hold in the annuity / drawdown market and provided valuable flexibility for those who want the security of guaranteed income for a fixed term but understand and accept the risk that at maturity it may not be possible to purchase another annuity paying the same level of income if annuity rates are lower than at the outset.

The Aviva plan with its Guaranteed Fund and potential for fund growth offers some protection against falling annuity rates but investors must understand that risk the fund associated with this option.


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