Unit Linked Annuity

If you are a young healthy retiree prepared to take risks with your pension fund, do not mind a fluctuating income, and want a completely investment linked annuity, a unit-linked annuity may suit you.

This type of annuity is offered by a few annuity providers, and will typically appeal to those who have other sources of retirement income on which they can rely if necessary.

Unit-linked annuities are generally not for the faint-hearted. Unlike other annuities they will usually require regular ongoing investment advice, as you can switch and mix and match investments to maximise your annuity returns. Any ongoing advice and excessive switching between funds can incur additional costs. Thus, unit-linked annuities are generally more costly to administer.

How Unit-Linked Annuities Work

The unit-linked annuity provider will use its company's actuarial tables to work out the monetary annuity income it will pay you. This will be based on your age and your partner's age if appropriate taking into account the optional annuity benefits you have selected, and the size of your pension fund. This monetary income amount is then converted into units of the pension fund, or funds chosen by you, or one of our advisers in conjunction with you if you have selected our advice service.

Each annuity payment made is then equal to the value of those units at a point in time, which is normally about 10 days before the annuity payment is due. Income from an equity linked pension fund is likely to fluctuate according to the market conditions at the time of every payment.

With most unit-linked annuities you can opt for an anticipated growth rate, which has a similar effect on the initial starting level of income as the anticipated bonus level of with-profit annuities. You choose a growth level within the unit-linked provider's permissible range, and this determines your initial income level. The higher the growth level you select, the higher your initial income, but the lower your future increases are likely to be. If the chosen pension fund does not perform as well as the selected growth level you choose then your income will fall.

Self Invested Unit-Linked Annuities

For ultimate freedom of investment choice within an annuity, you can opt for a self-invested option until age 75. This is considered by some to be the most risky annuity you can purchase. Self-invested unit-linked annuities are best suited to experienced investors, who prefer to invest in stock markets, and who want to keep their pension fully linked to equity markets.

Notes:

• Under the self invested option you can invest in a wide range of investments including, for example, shares, gilts, fixed interest deposits, building society deposit accounts, authorised unit trust and investment trusts. It should be noted that a direct investment into, bank and building society deposits, offshore investments and commercial property are not.
• Once age 75 is reached, under current legislation you can no longer self-invest. You can, however, switch to an in house unit-linked annuity with the same provider.
• Anyone contemplating a self-invested unit-linked annuity should also consider phased retirement or income drawdown as an alternative if permissible.

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It always pays to take advice if you want to know more about the benefits of each individual plan

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