Fixed-Term Annuity Calculator

What is a fixed-term annuity and how does it work

A fixed-term annuity is a retirement income product you can buy using your defined contribution pension pot. In return, it pays you a guaranteed income for a set number of years. The term is chosen at the outset and remains unchanged. When the term ends, the income stops.

Unlike a lifetime annuity, a fixed-term annuity does not depend on how long you live. It runs for a predetermined period, with fixed payments and a known end date. It is available from age 55 (rising to 57 from 2028), subject to pension access rules.

How income is calculated

The income you receive is based on:

• The size of your pension pot

• The number of years the annuity will run

• The annuity rate applied by the provider

• The payment frequency (monthly, quarterly, half-yearly, or annually)

Each payment typically includes both interest and capital. The interest is calculated on the remaining balance, while the capital is drawn down over time. Early payments contain more interest, while later payments draw more from the remaining capital.

Capital return at the end of the term

You can choose to retain part of your original pot to be returned at the end of the term. This is known as a capital guarantee or maturity value. The selected amount is set aside at the start and not used to calculate income.

It is held back and paid as a lump sum at the end of the annuity term. This reduces the income payable during the term, as less capital is available to generate payments.

Income options

You can choose how the income behaves during the term:

• A level annuity pays the same amount each period.

• A fixed-increase annuity increases income by a set percentage each year, such as 2 or 3 percent.

• An inflation-linked annuity adjusts income each year in line with a chosen inflation index.

Increases are compounded annually and are built into the payment structure from the start. The provider calculates a payment schedule that uses the available pot (after setting aside any capital return) in line with the selected term and income pattern.

Tax on payments

For fixed-term annuities treated as annuity contracts, income is typically split between a taxable interest portion and a non-taxable capital portion. Only the interest element is subject to income tax. This tax treatment follows rules under the taxation of purchased life annuities.

However, if your annuity is set up within a registered pension scheme, or as a pension annuity under HMRC rules, then all income may be taxed as pension income regardless of its capital content.

The actual tax treatment depends on how the product is structured and whether it is purchased using uncrystallised or crystallised funds.

What happens at the end of the term

When the term ends, income payments stop. If a capital return was agreed, that amount is paid as a lump sum. If not, the entire pot will have been paid out through income.

At that point, you may choose a new retirement income product, such as buying another annuity, moving into drawdown, or relying on other income sources like the State Pension.

Why people use fixed-term annuities

Fixed-term annuities are often used to provide guaranteed income over a specific period, such as the years between retiring early and reaching State Pension age.

Some people use them to defer buying a lifetime annuity, hoping for better rates later.

Others prefer the flexibility of having income for a known term without making a lifelong commitment. The known end date and potential for a capital return make fixed-term annuities a structured option for short- to medium-term retirement planning.