Variable Annuity

One of the key attractions of a variable annuity or other investment-linked retirement product, such as a unit-linked annuity or a with profits annuity, is the possibility of receiving an income comparable to a conventional annuity at the outset, with the potential for income increases to combat the effects of inflation and the opportunity of ‘real’ growth in the value of your underlying pension fund.

Income guarantees

A cost option

With a variable annuity, you still receive some income guarantees, but these provide less protection than the guarantees provided by conventional annuities. Guarantees cost money to provide, so the more guarantees included, or the higher their level, the more the cost to you.

Flexibility

To meet changes in your life

Keeping your options open also means that as your needs and your dependants’ needs change, your choices can be changed to reflect your new circumstances. For example, at an early age of say 58 you may need to include protection for a financial dependant, perhaps your spouse, which if bought via a conventional annuity contract would mean a lower income for yourself (see joint life annuity). But, if later in life you no longer need to include this protection and you have gone down the variable annuity route, you can buy your annuity without the insurance, which then provides a higher income. Here you get some idea of the flexibility.

Investment

Potential growth prospects

Variable annuity products also provide investment growth potential. Choosing a conventional annuity essentially means you are locking into today’s gilt yields – this underpins the guaranteed annuity income payable, but it also means you cannot participate in any possible growth. Effectively, your money is spent.

Product development

A changing market

The popularity of variable annuities as alternatives to conventional annuities rose slowly in the early years, the early 1990′s, due to falling annuity rates. With growing market innovation and the advent of income drawdown contracts in 1995, the number of people buying them increased. This trend continued until the early 2000′s when there was a distinct fall in popularity, probably because of the falling stockmarkets.

Third way annuities

In more recent times, we have seen the introduction of ‘third way’ annuities to the market. This new breed of variable annuity seeks to provide an element of secured income from an annuity, combined with some of the flexibility of an unsecured pension (otherwise historically known as income drawdown). These products vary widely in the way they are put together and who they appeal to, and new providers are coming into the market all the time.