Investment-Linked Annuities
Investment-linked annuities offer a variable income based on the investment performance of an underlying fund. Like conventional annuities, the basic level of initial income is dependent on your age, gender, size of funds and the options selected. Additionally, you are normally required to assume a future rate of growth for the underlying funds – the higher the selected rate, the higher your starting income will be and vice versa.
It is worth noting, however, that income levels under an investment-linked annuity will fluctuate and they will only be suitable for those who can cope with an income that varies from year to year. Subject to the annuity provider’s rules, you may change the assumed rate of future growth or switch to a conventional annuity at specified points in the future.
Types of Investment-Linked Annuities
There are two types of investment-linked annuities available:
With Profits
This is the most popular investment-linked annuity. The income provided by this Annuity is linked to the performance of the chosen insurer’s With Profits fund. These products can offer smoothed returns by retaining some of the profits within the fund during good performance and using them to supplement times of poor performance. This provides a more stable level of income, which is less likely to be subject to large fluctuation from year to year.
Unit-Linked
These policies are linked directly to the performance of an underlying fund, with no smoothing to limit the effect of good or poor performance. As a result they offer the potential for greater returns than a With Profits annuity, but are also likely to be subject to far larger fluctuations in the level of income provided. The greater volatility of income associated with Unit-Linked annuities means that they are considered to be a more risky choice than the With Profits alternative and will only be suitable for a relatively small number of individuals, with a more adventurous attitude to risk.
Advantages of Investment-Linked Annuities
- The possibility of achieving ‘real’ growth, above inflation, through investment in equity based funds
- By setting an assumption for future growth you can exercise some control over the initial level of income
- Most products guarantee a minimum level of income for life
Disadvantages of Investment-Linked Annuities
- Income levels will fluctuate from year to year, making these products unsuitable for anyone who requires a predictable level of income
- Your income could fall if fund performance is poor
Read our Alternatives to Conventional Annuities Guide >