What is an investment-linked annuity?

27th July 2012

Flexible pension options are quickly starting to become a popular choice for many people who are struggling with falling annuity rates caused by a tough financial market in the last few years. The popularity of investment-linked annuities has continued to grow as a way to give a person more choice over how their money is invested with the potential for more risk, but also more return if the correct choices are made.

In contrast to traditional annuities which are generally invested in safe bonds, investment-linked annuities tend to focus on higher risk investments which the potential for a higher return (but also a higher loss) and also the option for the annuitant to take real control over how their annuity works.

What are the different investment-linked annuities that I could choose?

There are a number of different investment-linked annuities that you could choose from but two of the most popular options on the market include:

  • Unit-linked annuities – these type of annuities allow an annuitant to make a medium to high risk investment. These investments can either be spread over quite a wide area of the market or potentially a niche market if you are looking for a higher risk fund. You might also opt for a tracker fund which follows the stock market
  • With-profits annuities – this type of annuity is slightly more risky than traditional annuities as it’s based on a predicted ABR or Anticipated Bonus Rate. This Rate allows you to consider how well your investments might perform (between 0 and 5%). If your ABR matches your bonus then it’s paid, but if it doesn’t then you could find that your income for the next year is considerably lower.

What are some benefits of an investment-linked annuity?

There are upsides and downsides to investment-linked annuities, depending on what you are looking for in your investments, but if you are looking for greater financial control and to take a little risk with your investments then investment-linked annuities offer the chance to do this. Investment-linked annuities give you the option to look for a higher return than current annuity rates, but they also come with the risk that you might receive a lower income if the market underperforms or bad investment choices are made.

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