Investment Linked Annuities typically invest in Unit Linked or With Profits investment funds with the levels of income received linked to how well the investments perform. Good investment conditions may produce an increasing income, whilst poor investment returns are likely to have a negative effect on the level of future income.
Investment Linked Annuities are like conventional Lifetime Annuities in some respects. You will need to make some decisions which are irreversible, such as whether you wish to include a spouse’s pension or a guaranteed period.
The income that you receive each year is not guaranteed, although many products provide a minimum level of income each year.
The actual income you receive will be directly influenced by investment returns and investment risk means that your income could be less than that provided via a conventional Lifetime Annuity.
However, there may be sufficient investment reward to produce an income higher than a conventional Lifetime Annuity.
Unlike Lifetime Annuities, Investment Linked Annuity contracts differ massively in structure and type; taking advice and guidance with these contracts is therefore 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 you will receive, but this will then fluctuate in line with investment returns in later years
- 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 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 get less back, than 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
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