Fixed Annuity

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Fixed Annuity

A Fixed or Level Annuity as opposed to a Variable Annuity is an insurance contract in which the insurance company makes fixed payments to the annuitant for the term of the contract, usually until the annuitant dies. A fixed annuity is a good financial instrument for those wishing to receive a fixed income.

The only problem with a fixed annuity is that, over time it looses its purchasing power due to inflation. For example, suppose when your annuity contract starts, your groceries cost £50 a week. If inflation averages 3% a year for 10 years, their cost would rise to £67 per week. If you could still only afford £50 then you would have to buy fewer groceries. That is the effect of inflation.

A fixed annuity pays a higher starting income than an Indexed Annuity. It is important to think very carefully about the effects of inflation. Do you think that you could cope with having no increases at all in your annuity income during your retirement that could be 30-40 years?

Here is an example of a Fixed Annuity:-

Cecil retires at 55 and, has a reasonable chance of living 25 years or more. After taking his tax-free lump sum he has a fund of £40,000 to buy his annuity. He chooses a fixed annuity, which pays him around £2,800 per annum (£235 per month or £54 per week). If inflation averages 3% per year, the buying power of Cecil's pension would fall dramatically as the years go by. After 10 years his £2,800 annual pension would only buy the same as £2,000. After 20 years it would fall to £1,500, and after 30 years would be £1,100. If inflation averages more than 3% per year then the buying power of Cecil's pension will fall even further and faster.

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