Investment Based Annuities

Conventional annuities are currently perceived by some people, rightly or wrongly, as offering ‘poor value for money‘.  The current low interest rate, low annuity rate environment leaves many of those retiring facing a stark reality – uninspired by conventional annuities, yet without sufficient fund size or risk profile for alternative retirement contracts.

For those who find themselves in this position and are prepared to take a little more risk with their annuity choice then consideration could be given to investment based contracts.

With Profits Annuities

With Profit annuities are designed to help overcome the problems associated with the conventional annuity, without having to sacrifice any of the standard options available from conventional annuities, such as widow‘s benefit, guaranteed periods etc.

As the name indicates, the pension fund used to purchase a With Profits annuity is invested in the With Profits Fund of the annuity provider.  The value of your income will move in line with the fortunes of the With Profits Fund, meaning income can go down as well as up.  To offset this potential problem, some annuity providers have introduced a guaranteed minimum income level, below which the annuity income can never fall.

The starting level of income will also depend on the ‘Anticipated Bonus Rate‘ chosen by the applicant at outset.  By choosing an anticipated bonus rate, you are in effect, receiving a part of the future growth from the fund in which you are investing.  The higher the bonus assumed, usually up to 5%, the higher the starting income. However be careful, should the declared bonus rate be lower than the assumed bonus rate taken then your annuity income will fall.

Unit-linked Annuities

Now only offered by a handful of providers, unit-linked annuities provide the applicant with a larger selection of funds to invest in, however, your income will be directly linked to the performance of these funds on a monthly basis. Due to the potential volatility of this type of investment, your income can go down as well as up and it is not guaranteed.

Your income is calculated by firstly deciding on an ‘Anticipated Growth Rate‘ usually between 0% and 5%.  The higher the rate chosen then the higher the starting income but the lower the potential future growth.

The income payable per year is calculated and then converted into units of the chosen fund(s) you wish to invest in.  It is then calculated how many units will be sold each month to meet that income. However, as unit prices fluctuate on a daily basis your income will be determined by the unit price at the time of payment, which can be higher or lower than the original price.

Unit linked annuities are possibly suited to the more adventurous investor and for those who have additional pension income and are not solely reliant on this for their pension income.  They can often be more costly to administer and should usually be taken out after careful consideration or advice.