What Are Investment Linked Annuities?
As income from standard annuities continues to fall due to stagnating bond yields, increased longevity and the new rules surrounding gender neutral pricing alternative retirement options have become more popular.
Investment Linked Annuities sit in the middle ground between having a guaranteed income for life from a standard annuity and the flexibility and investment choice of income drawdown.
what is an Investment Linked Annuity?
– It pays an income for life, as a standard annuity, in exchange for a pension fund.
– Future income levels could rise or fall based on investment returns
– They allow a choice of investment funds and the option to switch funds
– You can choose to have single or joint lives, a guaranteed period and in some cases minimum income guarantees.
The link to investment performance provided by an investment linked annuity means that income levels will fluctuate and therefore are only suitable for individuals who can cope with an income that may vary from year to year.
Types of Investment Linked Annuities
With Profits Annuities
Income provided by this type of annuity is linked to the performance of the chosen with profits fund. These type of funds tend to offer some level of smoothing which means it retains some of the profit of the funds during periods of good performance to supplement returns in periods of poor performance. This provides a degree of stability in the level of income received.
Unit Linked Annuities
The income from this type of investment linked annuity is linked directly to the underlying performance of the selected fund. They are considered a more risky investment choice and can offer the potential for better returns than with profit annuities but the level of income paid out will be subject to a greater level of fluctuation.
With both with profit annuities and unit linked annuities assumptions need to be made about future investment returns, the greater level of assumed return the greater the starting level of income will be. If the assumed return is not achieved there is a risk that your future income will fall. As with all investment linked policies financial reviews are recommended.
Advantages of an Investment Linked Annuity
– Access to tax free cash
– Ability to increase income level in line with investment performance
– Flexibility to reduce or increase income levels
– There can be guarantees built in to continue payment of income to a spouse if death occurs during that period
– Many contracts allow conversion to a standard lifetime annuity at a future date.
Disadvantages of an Investment Linked Annuity
– If investment returns are poor and do not match the assumed growth level this may reduce the future levels of income available.
– Due the level of investment risk your income may fluctuate from year to year
– If you die early you may not get back the amount of money you invested in the annuity
– Some providers may restrict the transfer out to a conventional annuity
Due to the complex nature of investment linked annuities expert independent financial advice is necessary to make sure that this option is suitable for your circumstances. Contact us and we can make sure you receive the advice you need to maximise your income in retirement.