An annuity is a financial product that is used to convert money saved in a pension pot into an income for the rest of one’s life after retirement. There are many different types of annuities to choose from, with something to suit all personal circumstances. Some people choose investment-linked annuities which are thought of as risky, yet have the potential to be rewarding. In this article we will explain what investment options you have with annuities.
Usually when a person retires they buy an annuity that guarantees to pay them a certain income for the rest of their life. Some of the traditional options include level annuities, which pay you the same amount each year, inflation-linked annuities which rise with the level of inflation and increasing annuities which increase over a certain time frame. Over the last few years traditional annuities have become less favourable. This is due to the fact that people are living longer and are receiving less favourable annuity rates on their pension pots.
The fall in annuity rates has led to an increasing number of people opting for investment-linked annuities instead. Investment-linked annuities produce income that rises and falls depending on the stock market and your investment returns. Most investment-linked annuities come with a guaranteed minimum income floor.
Benefits of Investment-linked Annuities
Whereas inflation will reduce the amount of money those on fixed interest annuities will receive over time, those with stock market investment-linked annuities may benefit from higher income if their investments grow successfully.
Investment-linked Annuity Risks
Whilst there are benefits of investment-linked annuities there is also an associated risk. If your investments do not do well or fail you could potentially have to live off the minimum income. You can reduce the risks by buying more than one type of annuity. For example you could allocate a percentage of your money to a level annuity and the rest in an investment-linked annuity.
There are two types of investment-linked annuities you can choose from. The first is with-profit annuities. These are annuities that link your income to the performance of your annuity provider’s with-profits fund. Many people choose this type of annuity as it smoothens out their returns over the life of their annuity.
The second type of investment-linked annuities is the unit-linked annuity. If you choose this type of annuity you will need to choose a particular set of funds to invest in, in an attempt to boost your income. There are a wide range of different funds to choose from with a variety of different investment assets.
Something to Keep in Mind
If you want to stand a chance at receiving high levels of income during retirement then an investment-linked annuity may sound appealing. However it is important to consider the risks involved. Most investment-linked annuities have a guaranteed minimum income floor, which is the lowest income you will receive if your investments fail for one reason or another. Before choosing an investment-linked annuity you need to make sure that the minimum income is sufficient for you to live off, should the worst happen.
Investment-linked annuities can provide fantastic returns for those willing to take the risk. Before choosing any type of annuity it is essential that you leave yourself plenty of time to carry out thorough research. You may also want to get advice from an independent financial advisor, who will help you assess your current financial situation. By doing research and getting expert advice, you stand the best chance at choosing the right annuity. It is essential that you choose the right annuity for you, as once you have chosen you cannot go back and change your mind!