Case study: Using a fixed term annuity to bridge early retirement

Client background

When Gary first sought advice, he was in his early fifties and working in the IT industry. He was considering early retirement and approached an adviser to see what that could look like. At the point of advice, he had total pension savings of £520,000 spread across several pension plans. His wife had retired much earlier and had limited provision of her own, so both were keen to explore with their advisers how to make their retirement income structured and reliable.

Gary was looking to retire at age 56 and expected to receive a generous defined benefit pension from age 60. This future income formed a key part of his planning and guided the solutions considered.

Attitude to risk and initial thinking

As part of the advice process, Gary completed an attitude‑to‑risk questionnaire. He was a cautious investor, a view that was reinforced during meetings by frequent expressions of concern about investment risk and market movements.

Despite his risk appetite, Gary initially felt that pension drawdown would be the most appropriate option. His reasoning was that a lifetime annuity felt unattractive given his later defined benefit pension. This would already provide a high level of guaranteed income but would likely push him into a higher‑rate tax bracket once in payment. He was also conscious that he did not need a permanent level of guaranteed income for life.

Income needs and tax planning considerations

Gary had assessed that he needed a gross income in the region of £40,000 per year, increasing at 2 percent interest per year. Careful tax planning was needed around the timing of his birthday and the start date of his defined benefit pension. If income streams overlapped into the next tax year, this could have resulted in unnecessary higher‑rate tax.

This made it particularly important to look at aligning income sources precisely over the early retirement period, rather than relying on a solution that required ongoing adjustment or assumptions about future investment returns.

Why drawdown was not the right fit

Gary explored pension drawdown with his adviser, but it became clear that it was unlikely to be suitable in practice. The adviser noted that Gary appeared uncomfortable when discussing market risk, suggesting that ongoing investment decisions and exposure to volatility could cause stress during retirement.

Given this, alternative options were considered that could better meet both his financial objectives balanced against his need for reassurance and certainty.

Introducing a fixed‑term annuity

Gary crystallised his pensions and took his full 25% tax-free cash upfront before purchase. The remaining pension fund was then used to purchase the fixed-term annuity.

How Gary’s pension was structured

All figures are approximate.

Item	Amount	Notes
Total pension savings	£520,000	Across multiple schemes
Tax-free cash (25%)	£130,000	Taken upfront
Used for ISAs	£80,000	Spread across two tax years
Remaining cash for spending	£50,000	Short-term use
Fund used to buy annuity	£390,000	After tax-free cash
Target income	£40,000 per year	Increasing at 2%
Guaranteed maturity value	£300,000	End of 3 year, 9 month term

A fixed‑term annuity quickly emerged as a strong fit for Gary’s circumstances and approach to risk. It offered guaranteed income for a defined period, flexibility over income levels, and full protection for his family through a guaranteed end value. This allowed Gary to draw a stable income while retaining a significant guaranteed value at the end of the term.

In Gary’s case, the guaranteed return of capital was also higher than could reasonably be expected from investing in line with his cautious risk profile. This helped address his concern about preserving value, while meeting his income needs.

Aligning the solution with later retirement income

The term of the annuity was set to align precisely with the expected start of Gary’s defined benefit pension. This resulted in a term of 3 years and 9 months, with a guaranteed maturity value in the region of £300,000. The annuity was structured to provide an income of around £40,000 per year while preserving a guaranteed maturity value of approximately £300,000 at the end of the term.

Gary was content to be presented with a single solution that could meet so many objectives, such as providing certainty of income, managing investment risk, and avoiding the need for ongoing decision-making during his early retirement years.

Preserving flexibility for the future

An additional benefit of this approach was the flexibility it preserved. At age 60, Gary would still be able to delay taking his defined benefit pension until age 65 if his circumstances changed. Doing so would remove early retirement reduction factors and give him additional options at a later stage.

The fixed‑term structure would offer Gary time and space to reassess his plans without locking him into permanent decisions too early.

Use of tax‑free cash

One key consideration was that all tax‑free cash had to be taken upfront or would be lost.

Gary took his full tax-free cash entitlement upfront. He was able to spread a sum in the region of £80,000 into Cash ISAs for himself and his wife across two tax years. The remaining funds were used to support planned expenditure in the early years of retirement.

Client outcome

Gary particularly valued the absence of ongoing charges and the lack of investment risk. The solution offered certainty that both income and maturity value were guaranteed throughout the term. At his age, the cost of including these guarantees was minimal, and the escalating income would in his view, meet his planned essential and discretionary spending going forwards.

Having seen pension values fluctuate during periods of market volatility, Gary valued stepping away from investment risk, unless he decided to revisit it at maturity. He described the outcome as removing a major source of worry.

Find out more

Find out more about how Aviva’s fixed term annuity could support clients who want certainty, flexibility, and control during retirement, explore the full product details, key features, and eligibility criteria.