Annuities Explained

If you're nearing retirement, so you might consider purchasing an annuity to provide income after completing the work. An annuity converts the pension you earned during your working life in a regular income to be paid until you die. There are several types of annuity contracts offered to consumers in the United Kingdom. Such an option is a unit linked pension.

In a standard annuity you convert your pension fund a guaranteed income. Unit linked annuities differ in that the amount of income is not guaranteed but is rather dependent on the performance of an underlying unit linked funds. This type of policy is similar to A with profits annuity in that it has all the same options, but the pension fund is invested in a unit bound to be a fund with the profits.

Unit linked annuities can work in one of two ways. When you purchase your annuity you can choose to subscribe to the policy based on growth rate supported. You decide how much you want the fund to grow so that you receive an income level you want. If the fund exceeds expectations then the annuity income will be increased, but if it under-performs then the income will be reduced. The other alternative is to buy an annuity with no assumed growth rate. In contrast, the income you receive will depend on the performance of the fund in which you invest.

A disadvantage of this type of annuity is that there is often a greater burden on the initial establishment of the policy. In addition to other charges, overall, this may reduce the amount of income you receive from the policy. Unit linked annuities are inherently more risky than standard pensions and if you are risk averse and prefer a guaranteed income, so you're probably better examine other options.