Investment-linked annuities, as the name suggests, are annuities where the income you receive will vary in line with the value of an underlying investment.
Here's a quick guide to what you need to know if you are considering buying one.
How an investment-linked annuity works?
The income you receive will depend on the investment performance of your underlying investment. Normally the underlying investment is either a unit linked or 'with profits' fund.
Regardless of the type of underlying investment offered an investment linked annuity will generally operate in the same way.
You will select a starting level of income which is based on an assumed growth rate each year. The higher the growth rate you select the higher the starting level of income.
Your income in future years will then depend on the whether the actual growth achieved by your underlying investment in those years is greater or lower than your assumed growth rate. If the actual growth rate exceeds your assumed rate, your income will rise. If the actual growth rate is less than your assumed growth rate your income will fall.
What are the advantages and disadvantages of an investment-linked annuity?
• If your underlying investments perform better than your anticipated growth rate your income will rise.
• An investment linked annuity also provides an element of mortality protection.
• Your income is not guaranteed and can fall as well as rise as it's dependent on the growth of the underlying investments compared to your assumed growth rate.
• Investment linked annuities are not as flexible as other invested retirement income options such as flexi-access drawdown.
• There is a relatively restricted range of providers.
Do I have to go to a specialist to get an investment linked annuity?
No. Although if you're 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.