What are investment-linked annuities?
When it comes to retirement many people are looking to get the best return that they can for their investment. Although many people choose to invest their retirement income in stable investments which generally guarantee a return, some people elect to take a higher risk approach to investments and invest in areas where the returns involve more risk, but can be a great deal higher if successful.
Investment-linked annuities are dependent on the stock market, so if you are looking to invest in this type of annuity then you need to put your faith in the stock market as your income will depend on market fluctuations – if the market goes down then your income will go down and so forth. This type of annuity awards the purchaser the ability to have a greater influence over their retirement income and to invest it as they like – thus giving them the ability to take a higher income, but also with the risk of losing income through poor investment decisions.
What are the types of investment-linked annuity?
When it comes to investment-linked annuities there are two main types:
- With-profit annuities – allow you to choose an ABR which can vary from 0 – 5%. This amount dictates how much bonus you expect to receive from the market. This is usually set low to guarantee an income, but can increase with profits. If you set this too high you may see your retirement income fall.
- Unit-linked annuities – these annuities allow the purchaser to choose their level of risk. This can range from medium which spreads the risk over a variety of investments to higher risks which are more specific and can therefore yield higher returns.
What are some benefits of investment-linked annuities?
This type of annuity allows the purchaser to have a greater flexibility over their investments and gives them the ability to choose a higher risk option which could potentially bring a higher return to them, rather than just sitting on a typical annuity income.
What are some drawbacks?
As with any market investment there is always the risk of investments going down. Instead of having the stable income that you would come to associate with a traditional annuity, there is a risk involved here that your income could fluctuate along with the market. In some cases, such as the with-profits annuities there may be a minimum income “safety net” available.