Investment-linked annuities are a much-debated topic among financial advisors. Some are reluctant to even mention, let alone advise clients on, this annuity option due to the element of risk involved. With this type of annuity, a portion of your pension lump sum is invested into a stock market-related asset, where it is hoped that your money could grow considerably more than it would with a regular annuity.
This means that a part of the regular income you receive may vary in amount, and you must be prepared to weather falls as well as rises. The nature of an investment-linked annuity is undoubtedly one of risk, but the objective is a higher return on your money than you might get with a regular or fixed annuity.
There are two types of investment-linked annuity: With-Profits, and Unit-Linked annuities. A With-Profits annuity ties a proportion of your money up in the annuity provider's chosen investment option, while Unit-Linked places it into another fund or asset recommended by the provider, which you can choose. With a Unit-Linked annuity, income is likely to vary from month to month, so it is perhaps unsurprising that many older people feel this option has the potential for creating more, not less, worry for them once they have finished working. Retirement is supposed to be a relaxing time of life, so risk-averse people might want to avoid an investment-linked annuity!
However, there are certainly benefits with an investment-linked annuity, as well as drawbacks. Those with a flavour for the unknown, or who feel they are in a position to bear financial fluctuations, may well get to enjoy these benefits.
It is perfectly possible that your money could perform very well indeed whilst tied up in an alternative asset. Certain markets and business sectors are always growing and unlikely to suffer major losses, but it is advisable to do some research before you choose your fund or asset.
Tying up retirement funds in an investment-linked annuity also has the potential to keep your money 'up-to-date', so to speak, as it performs in line with current rates rather than steadily reducing in spending power with inflation. While most annuities prepare for inflation by steadily increasing your income each year, an investment-linked annuity may surpass this measure and provide you with an increasing actual income.
So, assess the risks and rewards in relation to your own situation, research the market - and without question if you're in doubt over your options or are unsure whether a particular product is right for you, seek professional advice on the matter! If an investment-linked annuity is right for you, you'll be satisfied with your choice. However, if you get it wrong because you haven't sought proper advice, you might just kick yourself - hard!
An independent annuity advisor can help guide you through the options available and help you find the right retirement income to suit your individual circumstances.
John T Hughes writes for Annuities Rates, an annuity information site which aims to provide expert independent financial advice for those looking to maximise their income in retirement.
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