Investment linked annuities
These days there is a proliferation of annuity options and
as well as impaired and lifestyle annuities the prospective retiree should
consider the merits of investment linked annuities. These product (with-profits
and unit linked annuities) allow the annuitant to continue benefit from equity
linked investments whilst in retirement. Those reaching 65 can expect a long
retirement these days with the National Statistic Office stating that there
is increased life expectancy for this age group with male lives surviving
to 82 and female lives surviving to age 84 and therefore retirement products,
such as annuities will be long term investments.
Conventional annuities will therefore be disadvantaged over the long term
since its purchasing power will be affected by inflation over the long term.
Even though inflation has been reasonably benign over recent years, I think
that there is a growing amount of evidence that inflation will be more significant
in forth coming years. As we are all aware, inflation can erode the buying
power of income and even a small amount of inflation can have an effect on
your buying power. Taking out an investment linked annuity can help counteract
the effects of inflation by helping you to protect the buying power of the
annuity. A with-profits annuity taken out in January 1997 with a starting
income of £10,000 p.a (with a 3% anticipated bonus rate) would provide
an income of £15,714.18 p.a. today (source - Prudential).
The downside of these types of annuity is that the income is likely to fluctuate
and investment returns can go down as well as up. With-profits annuities do
have a minimum income guarantee so there is a safety net available, whilst
unit-linked annuity tend to be more volatile and generally don't have a safety
net. However retirees considering investment annuities must be prepared for
their incomes to fluctuate over the years and therefore must have resources
to plug the gap, if the need arises.
You must also be able to tolerate some level of risk by taking out an investment
annuity. However, taking no risk at all and buying a conventional annuity
means that you might get caught out in the future by inflation and over the
years this can be very damaging to fixed incomes.
