Variable Rate Annuity – benefit from the stock market
With a variable rate annuity your pension savings are invested in stocks and shares, bonds and other investments. This is in contrast to other types of annuities where your annuity purchase gives you an agreed, fixed annuity rate, and a predictable annual pension income.
While this gives you the potential to the benefits of a stock market-based investment, variable rate annuities can also mean that the value of your investments may fall. It is this unpredictable variation in the performance of the investment funds that makes the annuity rate variable, as opposed to fixed.
In a year when the investments underlying variable annuities do well, the value of your pension fund increases. In a bad year, however, the reverse is the case and your fund value will fall.
As the annual income from a variable rate annuity is not predictable, it is wise to take independent annuities advice, and have annuities explained to ensure that a variable annuity is right for you.
Are you thinking of choosing a variable rate annuity? Ask us now for advice by making an annuity enquiry or call 0800 678 5929 now.
There are two types of variable annuity products.
The first is a with-profits annuity, where your savings are invested in the insurance company’s with-profits fund.
Variable Rate Annuity – with profits
You can choose to match the annuity provider’s fixed rate annuity product using a with-profits annuity. If their fixed rate annuity rate is 3.9% this year, but the investments in their with-profits variable rate annuity yield 5.1%, then the value of your investment will increase by 1.2%, as you are ‘taking out’ only 3.9% of that performance. This will mean that you go into the following year with the value of your savings having increased.
This could mean that a ‘pension pot’ of £100,000 might grow to £102,000, due to growth in the investments made by your annuity provider. In the following year, you would therefore be taking 3.9% from a larger pension pot, with the result that your actual pension income is increased.
However, if the investments underlying your variable rate annuity do not reach performance targets, then the value of your pension pot has gone down, and so the actual cash value of the 3.9% you are taking as pension income in the following year will also fall.
Variable Rate Annuity – unit-linked
With a unit-linked variable rate annuity, your income depends on the value of the unit-linked funds you have invested in.
Again, the value of your investment or pension pot will rise or fall depending on the performance of the unit-linked fund where the cash is invested, and the value of your income will rise or fall as well.
It is important to note that variable annuity fees are higher than the fees for fixed rate annuities and other annuity types, due to the costs associated with funds-based investments in general.
The issue of deciding between a standard annuity and the less predictable – but potentially higher – income from a variable rate annuity are complex. Taking quality independent financial advice is essential when making your choice.
Do you wish to compare the standard retirement annuity with the variable rate annuity? Make an annuity enquiry or call 0800 678 5929 now.
