For many people the attraction of buying a guaranteed annuity is the word "guaranteed"- you pay a premium with your hard-earned pension fund and get a guaranteed income for life.
At the other end of the spectrum there are those who don't want to commit to a guaranteed income and are happy to expose their fund to the changeable stock market, generating a pension income through draw-down. However, if neither option appeals to you, you may want to consider the so-called "third way": The variable annuity.
Variable annuities are a relatively new addition to the insurance market in the UK, but have enjoyed some success in the USA for a number of years.
When you purchase a variable annuity part of your fund can be converted into a regular income (the potentially guaranteed element), while the rest is invested in fund options of your choice (the variable element). Guarantees do not apply to funds held in variable investment options and you should always check with a prospective provider as to protection offered to both element of your fund.
A variable annuity will offer greater flexibility than their standard counterparts. Nevertheless, it is important to recognise that at least part of your income will be exposed to some risk. The degree of risk will depend on the investment options that you choose. As a result many providers will offer guarantees of principal and downside protection for an additional fee.
In return for the added risk that you face, variable annuities bring the opportunity for market appreciation. This means that if the investment portion of your fund is successful you may see an increase in the amount of income that you receive.
Another benefit of a variable annuity is that when you pass away remaining funds can be passed on to a named beneficiary and are not subject to probate.
When you purchase a variable annuity you will usually be offered a range of different options to choose from. Variable annuities allow you to retain greater control over your funds which may seem particularly attractive in the current climate where standard annuity rates have slumped significantly over the past decade.
Variable annuities also offer potential for tax deferred growth so your funds will not be taxed until it is withdrawn. Because your money will managed through an investment fund you may incur management charges, it is important that you discover what these charges are before you sign up to any agreement.
Choosing an annuity could be one of the most important financial decisions that you make in later life. You may want to speak to an independent annuity advisor who can help you compare annuities and guide you through your option and find the best deal for your needs.
John T Hughes writes for Annuity Rates UK, a site that connects consumers to annuities advice they can trust.
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