Unit Linked Annuity

A unit linked annuity operates in a similar way to a with-profits annuity but instead of your money being tied up in a with-profits fund it is placed in a unit-linked fund. The income levels you can receive each year depend on the performance of these funds. The person taking the annuity assumes a growth rate at the start. The higher this growth rate is, the high your starting income will be. Should the actual growth rate not match the assumed growth rate, then your future income will fall. Basically you are hedging your bets against the performance of the unit-linked fund. Because these are equity based investments, these types of annuity are seen as a higher risk than conventional or with-profits annuities. Although longer term equities have performed well, there is much less certainty in the short-term. Unit linked annuities are therefore less popular with annuitants and tend only to be taken by those retirees who can bare the risk and have some other source of income.

When investing in unit-linked annuities you will have a number of choices as to which funds you want to invest in. These are broadly as follows.

-What are known as a ‘medium’ risk fund where the fund manager will pick a spread of investments, both high and low risk

-Higher risk funds. The fund manager will pick niche or very specific funds, with a higher risk but also the chance of a higher return

-Tracker fund which tracks a specific stock. These have lower fees as there is less management involved

These are just the main choices, there are many different options when it comes to investment linked annuities.

Unit linked annuities, like any other investment based annuities carry a certain risk. The risk is your income could fall, something which can never happen with a level or escalating annuity. However choosing a level annuity means your spending power will fall in real terms each year, and if inflation remains high, your money will buy less and less as each year passes. If you have a sizeable pension fund and can bare the risk then a unit linked annuity maybe the best option.