Investment linked Annuities
What is an investment linked annuity?
Within investment linked annuities, lies the potential to exponentially increase your post-retirement income. This sets them apart from the conventional level annuities and escalating annuities because they are linked to your fixed-interest assets such as bonds and gilts.
There are two types of investment linked annuity that you can choose.
Your insurance company will have a With-Profits Fund and your income will depend on the performance of this fund. Your income will be made up of two parts:
Minimum starting income – You should receive at least this every month, but it is usually set at a low level. Check with your provider to see if they guarantee this.
Bonuses – The rates of these may be guaranteed by your provider. Bonuses are typically announced every year and depend on certain factors. The most important factor is stock market performance. You should also be able to choose the bonus rate (usually about 3%).
Within with-profits annuities, you can find some security in that the peaks and falls of the stock market are smoothed over somewhat, and that you will receive a minimum income.
With unit-linked annuities, your income will be determined by the performance and value of your investments. Here you may have the ability to choose the level of risk your investments will face, with the aid of a fund manager.
This is the more risky investment-linked annuity. If your investments fall, there is typically no minimum income provided for you to fall back on. Should your investments perform as assumed, your income will continue at the same rate. If it exceeds assumptions, you stand to gain a higher income. However, if it does not meet expectations, your income will fall.
You are not advised to consider this type of investment linked annuity if you cannot handle the risk of a dramatic drop in performance from your investments.
Is an investment linked annuity for me?
There is no denying that the chance of increasing your retirement savings is an attractive prospect for anyone, and it is certainly a possibility with this annuity. However, this does not mean that it’s a popular choice by any means. Choosing an investment-linked annuity means that you must be comfortable with risking at least a good portion of your savings. The money that you invest will be relying on the movement of the stock market, whether it rises or falls. If you cannot financially handle a dramatic drop of your invested funds, this annuity is probably not for you. You should always take the advice of a financial expert before you consider a risky annuity such as this.
Thinking of Retiring Soon? Have a look at our Annuity Comparison Table