A variable annuity rather than a conventional annuity?

If you are wanting the potential for a growing income in retirement, you could be attracted by a variable annuity or other investment-linked retirement product. They provide the possibility of you receiving a comparable income to a conventional annuity at the outset, but with the potential for income increases to combat the effects of ongoing inflation. You also get the opportunity of ‘real’ growth in the value of your underlying pension pot.

With a variable annuity contract, you still receive some income guarantees, but these do provide less protection than the guarantees you get with conventional annuities. Guarantees naturally cost money to provide, so the more guarantees that are included, or the higher their level, the more the overall cost to you.

Keeping your options open is a good thing. It means that as your needs and your dependants’ needs change over time, your choices can be changed to reflect those new circumstances. 

Variable annuity contracts also provide investment growth potential. Choosing a straightforward pension annuity essentially means you are locking into today’s gilt yields which underpin the guaranteed annuity income payable. However, you can’t participate in any possible growth. Your money is, well, spent!

The popularity of these contracts as alternatives to conventional annuities rose slowly in the early 1990’s, due to falling pension annuity rates. With growing market innovation and the introduction of  Income Drawdown contracts in 1995, the number of people buying them grew. This trend continued until the early 2000s when popularity wained, probably because of the falling stockmarkets at the time.

We now have ’third way’ annuities. This new breed of variable annuity is designed to provide an element of secured income from a pension annuity, combined with some of the flexibility of an Unsecured Pension (USP) (otherwise known as income drawdown). These products vary widely in the way they are put together and who their target market is.

To gain a proper understanding of the complex nature of these products and whether they are the right for you, or whether other pension options are more suitable, speak to an adviser from Origen.