Unit Linked Annuity
A unit linked annuity involves a degree of investment and therefore risk. It is different to a conventional annuity, because what you will get out of it is not guaranteed. A conventional annuity sets out in black and white exactly the income you will get through the rest of your life, whereas a unit linked annuity can involve an income that goes down as well as up thanks to the investments connected to it.
A unit linked annuity is called ‘unit linked’ because it is connected to the investments run as a fund by your insurance company. You can normally opt for different types of fund in which the cash will be invested, often on a sliding scale of risk. A medium risk managed fund, for example, uses a fund manager who will choose a selection of shares and investments on your behalf, spreading cash across different assets, decreasing the risk to an extent.
Higher risk funds are also available. Again this will involve a fund manager investing cash in more specific sectors or even countries.
A higher risk fund does not involve a fund manager selecting somewhere to put the cash at random, as clearly a degree of professionalism and judgement will be involved. But nothing is without risk and the value of your investment can go down as well as up. You could get a disappointing return, or you could have a very financially healthy retirement.
There are also what is known as tracker funds, often considered a medium risk, which will track the ups and downs of a stock market index like the FTSE 100, which is like a league table of the UK’s top 100 companies according to the market values.
It is important to note that a unit linked annuity will not normally involve any minimum income guarantee, meaning there is no bottom to fall back on if investments do not turn out in your annuity’s favour.
Therefore a unit linked annuity is better suited to people who are comfortable with the idea that their income could go up and down. Unit linked annuities can be best for those who have considerable pension funds or other cash amounts to back them up if the unit linked annuity fails to deliver in the way they expect. Anyone who is unsure should always consult an independent financial adviser to find out what is best for them.
