What is a Unit-Linked Annuity?

A unit linked annuity is a form of investment linked annuity whereby your pension fund is invested into a unit-linked fund.  In this respect they are similar to with profits annuities in that your pension fund is invested as opposed to being tied to the performance of gilt yields, as is the case with level annuities. As with other forms of investment annuities the amount of income you get from a unit linked annuity can go up as well as down. When someone purchases a unit linked annuity they have to pick what is known as a growth rate. Picking a high growth rate will mean that your initial starting income will be higher. However if the growth rate from the unit linked fund does not match you chosen growth rate your income will fall. Unit linked annuities are generally perceived as high risk even compared to with-profits annuities as they are based on the performance of equities.  Although they tend to be higher risk they can also offer a greater reward if there is a high growth rate reported by the fund. That said they only really suit wealthier retirees who can afford to take a potential drop in income.

When you take out a unit-linked annuity you will have to pick the type of funds you want to invest in.  Below we have outlined the broad categories…

  • A medium risk fund containing some higher risk and some lower risk investments
  • High risk funds, often containing niche categories such as wine for example
  • Tracker funds. These track specific stocks that require less management. This also reduces the administration cost

This is just a selection of investment options -  there dozens of other choices and investment opportunities available for those taking a unit linked annuity. They are not for everyone of course but if you have some knowledge or expertise regarding investments then you may find this type of annuity suitable. Remember though that as with any kind of investment your income could go up as well as down. However, if you have other forms of income in retirement aside from your pension fund and feel confident about choosing investments then a unit-linked annuity may be the best option.

Further Reading

Annuity Discount - Unit Linked Annuities
Annuity Advisor on Unit-Link Annuity
Chancellor Financial
Pension Choices Unit Link Annuity Information

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