Investment-linked annuities


Investment-linked annuities, as the name suggests, are products where the income you receive will go up and down in the same way as the stock market does. If your pension pot is large enough – and you can accept the risk that comes will all investment products – these could be a suitable product. If not, and security is the most important thing for you, then you might need to look at alternatives.

Here's a quick guide to what you need to know if you are considering buying one.

 

What is an investment-linked annuity?

It's another type of annuity, one that uses the money you've built up in your pension pot to buy investments. Instead of simply 'exchanging' that money, the provider reinvests the funds in other ways, with the aim of giving you a regular income. 

Is it more risky?

Yes. Your income will depend on the investment performance of your funds. Investment-linked annuities work by linking in to a range of equity funds, or specialist funds such as 'with profits' funds.

They may produce more income (if the investment performance is good), but they're only really suitable for people who are comfortable with taking risks or who have other assets to fall back on. In general, investment-linked annuities would be something you'd only consider if you have a bigger pension pot or a bigger appetite for risk.

Is it the same thing as a variable annuity?

No. Variable annuities are set up to work in a similar way to a capped drawdown product - they allow you to access some of your pension fund and use it to invest in underlying investments. The provider offers a guaranteed income for life, but the value of the annuity itself will fluctuate in line with the investment performance of those funds.

At regular intervals the provider will review the annuity. If the underlying funds are worth more, then your guaranteed income will increase to some extent (there may be a cap on that increase). However, if the funds are worth less, then your income will be guaranteed not to fall beyond a certain point. This could be significantly less than you might have received from an alternative lifetime annuity.

So would I get guaranteed income from a variable annuity?

Yes, your income would be guaranteed for life at the rate set when you take out the product. However, the level at which this is set is likely to be lower than the rate you'd get from a lifetime annuity, and if the investments don't perform well, then you may be worse off than if you had taken out a lifetime annuity at the start.

Advantages

  • You could benefit from strong performance in the financial markets.
  • If the value of the investment funds increases, then so could your annuity income. 

Disadvantages

  • These annuities have a much higher level of risk attached to them. The financial markets in which they're investing can go down as well as up, and that will affect your income.
  • If the financial markets don't perform well, you'll get less money – sometimes a lot less, depending on the investments you've chosen.
  • There may be extra charges linked to investment in funds, which could reduce how much you receive, particularly when compared to the amount you'd get from a standard or enhanced annuity.

So why would I think about these asset backed annuities?

Much depends on the amount of pension pot you have to play with, and how much risk you feel comfortable with. Arranging the income you'll depend on for the rest of your life is not a game, but some people are interested in the opportunity that investment growth can present (while taking account of the risks!)

Do I have to go to a specialist to get an investment linked annuity? 

Not necessarily. If you are interested in investment-linked annuities, we recommend that you speak to a professional financial adviser first. You'll find advisers in your local area on thepfs.org and unbiased.co.uk.