Summary

Fixed-term annuities pay a guaranteed income for a defined period (commonly 5 to 15 years) and typically return a Maturity value at the end, leaving reinvestment choices open.

Lifetime annuities pay a guaranteed income for as long as the annuitant lives, transferring longevity risk entirely to the insurer.

The choice between the two hinges on certainty, flexibility, view on future rates, health, partner needs and the wider retirement income plan.

Key Takeaways

• Fixed-term annuities offer income for a defined period plus a maturity value; lifetime annuities pay for life.
• Lifetime annuities remove longevity risk entirely; fixed-term annuities retain Reinvestment Risk at maturity.
• Both can include joint-life, escalation, enhanced Underwriting and guarantee period features.
• Tax treatment is the same in principle: up to 25% tax-free cash, then Taxable Income via PAYE.
• Pension Wise from MoneyHelper offers free guidance on retirement income Options.

Fixed-Term vs Lifetime Annuity: Which Option Suits Retirement Income?

Among the most important decisions for UK defined contribution savers entering retirement is whether to commit to a lifetime annuity, take a fixed-term annuity for a defined period, or use neither and rely on drawdown. While the lifetime annuity has long been the default 'guaranteed income for life' option, fixed-term annuities have grown in profile as buyers look to lock in current rates without committing for the rest of their lives.

Both products are insurance contracts issued by FCA-authorised providers and both pay a guaranteed taxable income. The difference lies in horizon: a lifetime annuity is for life; a fixed-term annuity runs for a set number of years, typically 5 to 15, and usually returns a guaranteed maturity value at the end. That maturity value can then be used for another annuity, moved into drawdown, or taken as a lump sum subject to tax.

This guide compares the two structures across income certainty, flexibility, death benefits, tax, longevity protection and reinvestment risk, in line with rules in force for 2025/26. It is intended as general information and not as a personal recommendation.

How a Lifetime Annuity Works

A lifetime annuity pays a guaranteed income for as long as the annuitant lives. The insurer absorbs both Investment risk (it has to fund payments regardless of market returns) and longevity risk (it pays even if the annuitant lives much longer than average).

Income is shaped at purchase using a series of choices: single or joint life, level or escalating (RPI, CPI or fixed percentage), guarantee period (commonly 5, 10, 15 or even 30 years) and value protection. Each feature reduces the starting income in exchange for added protection.

Once a lifetime annuity is set up, the contract is generally irreversible. The FCA requires firms to make this clear and to highlight the open market option before purchase.

How a Fixed-Term Annuity Works

A fixed-term annuity pays a guaranteed income for a defined period - usually 5, 10 or 15 years - and typically includes a guaranteed maturity value at the end of the term. Some plans offer a nil maturity value in exchange for a higher income during the term.

At maturity, the buyer can use the residual amount to purchase another annuity (at then-current rates), transfer it into drawdown, or take it as a taxable lump sum. This optionality is the defining feature of the product.

Like lifetime annuities, fixed-term plans can include escalation, joint-life and underwriting features, although the precise range varies between providers.

Income Certainty and Longevity Risk

A lifetime annuity provides the strongest form of longevity protection available in the UK retirement market: income for life, regardless of how long that may be. For those without other guaranteed sources of income beyond the State Pension, this can offer significant peace of mind.

A fixed-term annuity does not remove longevity risk; it only delivers certainty for the chosen term. At maturity, the buyer faces the question of how to convert the remaining Capital into ongoing income, potentially at very different rates and at an older age.

Flexibility and Reinvestment Risk

Fixed-term annuities are more flexible than lifetime contracts in one important sense: they preserve future choice. Health, family circumstances, tax rules and the rate environment can all change over 5 to 15 years, and the buyer is free to respond at maturity.

The flip side is reinvestment risk. If gilt yields fall and personal circumstances haven't improved, the buyer may find that the next annuity offers a lower income than the original. Conversely, if rates rise and health declines (qualifying the buyer for an enhanced annuity), the maturity decision can be advantageous.

A lifetime annuity locks in the rate environment at the date of purchase and gives no further reinvestment exposure.

Tax, Death Benefits and Beneficiary Options

Both products treat income the same in principle: up to 25% tax-free cash from the original pot is usually available at outset (subject to the Lump Sum Allowance), with the remaining annuity income taxed under PAYE as Earned income.

Death benefits differ in nuance. For lifetime annuities, joint-life, guarantee periods and value protection govern what continues. For fixed-term annuities, if the annuitant dies during the term, the contract may continue paying to a beneficiary or pay out the remaining value, depending on the chosen options.

HMRC's general framework on pension death benefits applies; specifics should be verified on GOV.UK and in the policy documents.

Costs, Charges and Comparing Quotes

Neither product carries explicit ongoing platform fees; insurers' costs are baked into the rates offered. However, the shape of the contract (escalation, joint-life, guarantees) materially affects the starting income.

Comparing quotes is essential. MoneyHelper provides a free annuity comparison tool, and a regulated annuity broker or an FCA-authorised independent financial adviser can help match shape to needs. The ABI Code of Conduct on Retirement Choices and the FCA's Retirement Outcomes Review emphasise shopping around.

Buyers should always disclose qualifying health or lifestyle conditions, which can lead to a meaningfully higher enhanced annuity quote on either product type.

Who Each Option Tends to Suit

A lifetime annuity tends to suit buyers who want maximum certainty, have limited other guaranteed income, are comfortable with locking in current rates and value joint-life or Inflation protection.

A fixed-term annuity tends to suit buyers who want guaranteed income for a specific phase (for example, bridging to State Pension age), expect circumstances or rates to change meaningfully within 5 to 15 years, or want to retain optionality without bearing full investment risk during the term.

Neither is right or wrong in the abstract; the choice should align with the saver's overall retirement income strategy, ideally informed by Pension Wise and, where appropriate, regulated advice.

FAQs

Q: What is the main difference between fixed-term and lifetime annuities?
A: A lifetime annuity pays a guaranteed income for as long as the annuitant lives. A fixed-term annuity pays for a set number of years (commonly 5 to 15) and usually returns a guaranteed maturity value at the end, which can then be used flexibly.

Q: Can I take 25% tax-free cash from either type?
A: Yes. Both lifetime and fixed-term annuities are normally purchased after taking up to 25% of the relevant pension pot as a tax-free lump sum, subject to the Lump Sum Allowance. The remaining annuity income is taxed under PAYE.

Q: What happens at the end of a fixed-term annuity?
A: At maturity, the buyer typically receives a guaranteed value which can be used to buy another annuity, transferred into drawdown, or taken as a taxable lump sum. Future options depend on the rules and the buyer's circumstances at that time.

Q: Are fixed-term annuities riskier than lifetime annuities?
A: They carry reinvestment risk: the income available at maturity is unknown and depends on future gilt yields, longevity assumptions and personal health. A lifetime annuity removes this risk by locking in income for life from outset.

Q: Can either type include inflation protection?
A: Both can be set up with escalating income, rising in line with RPI, CPI or a fixed percentage. Escalation reduces the starting income but provides protection against the erosion of purchasing power.

Q: Where can I compare fixed-term and lifetime annuities?
A: MoneyHelper offers a free annuity comparison tool covering authorised providers. Regulated annuity Brokers and FCA-authorised independent financial advisers can also produce tailored comparisons including underwritten enhanced quotes.