HomeInvestment Linked Annuities typically invest in Unit Linked or With Profits investment funds and the levels of income received are linked to how well the investments perform. Good investment conditions may produce an increasing income. Poor investment returns are likely to have a negative effect on the level of future income.
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Investment Linked Annuities are like conventional Lifetime Annuities in some respects. You will need to make some decisions that are irreversible, such as whether you wish to include a spouse’s pension or a guaranteed period. Income is taxed as earned income.
The income that you receive each year is not guaranteed and will be directly influenced by investment returns. Investment risk means that your income could be less than that provided via a conventional Lifetime Annuity. However, potentially there may be sufficient investment reward to produce an income that is higher than a conventional Lifetime Annuity. As the Investment Linked Annuity provides the opportunity for increasing income benefits, comparison should be made against an increasing Lifetime Annuity as well as a level Lifetime Annuity.
Unit Linked Annuities & With Profits Annuities
In order to establish the starting level of income, it is usually necessary to make an assumption as to what future investment returns are likely to be. Depending on the assumptions made, the initial amount of income received from a With Profits or Unit Linked Annuity may consequently be lower than that from a level Lifetime Annuity.
The greater the level of assumed investment growth, the higher the starting level of income. However, the higher the level of assumed investment growth, the greater the risk that your future income may fall, if the assumed investment return is not achieved. You should be prepared to consider a lower income level if targeted investment returns are not achieved. This may be referred to as your ‘capacity for loss’.
There are a range of Investment Linked Annuity contracts available in this sector with different variations in structure. Contracts often offer a mechanism to limit the level of downside, for example, some offer a guaranteed level of income below which your income cannot fall, irrespective of investment performance. This is normally significantly below the Lifetime Annuity income that you could have obtained.
With Profits Annuities offer a smoothed level of investment returns and therefore a structure to limit the downside of the contract. The investment returns are typically declared each year by the With Profits fund actuary. Investors and advisers should consider the strength of the underlying fund, and the ability of the investment managers before selecting a With Profits Annuity provider.
Unit-linked Annuities operate in a similar way to With Profits Annuities but can have a higher degree of risk.
Investment Linked Annuities offer the opportunity to remain fully invested and take advantage of long-term investment returns. These plans can continue for the rest of your life, although some providers insist upon a disinvestment and the purchase of a Lifetime Annuity by the age of 90. Most Investment Linked Annuity contracts offer the opportunity to convert to a conventional Lifetime Annuity, although some restrictions are likely to apply, for example having to buy the Lifetime Annuity from the same provider as your Investment Linked Annuity.
Financial reviews
Investment Linked Annuities require regular reviews, which of course need to be paid for if you are using an IFA. As an investor it is important to both understand this type of product, and engage in the ongoing review and management of investments.
Exit strategies
Although it is possible with most products to switch to a Lifetime Annuity at a future date, some restrictions may apply. It is important to understand the specifics of the product used in these circumstances.
Contract differences
Unlike Lifetime Annuities, Investment Linked Annuity contracts differ massively in structure and type; taking advice and guidance with these contracts is essential.
Advantages of an Investment Linked Annuity
- You have immediate access to some or all of the tax-free cash available
- You can have some flexibility in the starting level of income that you will receive, but this can fluctuate in line with investment returns • If investment returns are above expectations you may have the opportunity to grow your retirement income
- Some contracts may allow you to vary your level of income, allowing you to match income tax bands, offset other incomes, or take ad hoc income payments
- Subject to the risks outlined above income payments can be ‘guaranteed’ for a certain period so that they will continue to be paid for the remainder of the selected fixed period after your death
- Depending on how long you live, you may get back more in income than you used to buy the Annuity in the first place
- Most contracts allow the investor to convert to a conventional Lifetime Annuity at a future date. Some allow this on an Open Market Option basis
Disadvantages of an Investment Linked annuity
- Investment returns may be negative and can reduce the future level of income available to you
- Investment risk must be fully understood
- Your income may fluctuate, as the income payable in any one year is dependent on the rate of investment return achieved and the initial assumptions made
- It is possible that you may not get back the amount of money you invested in the annuity if you die early
- This is a more complex type of plan and requires ongoing advice which will need to be paid for
Next steps
Our team of Independent Financial Advisers in are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
Further Information
Key Considerations
Options
Lifetime Annuity
Fixed Term Annuities
Income Drawdown
Phased Retirement
Steps to consider leading up to retirement
