Unit Linked Annuity
Overview
A unit linked annuity is very similar to a with profit
annuity in that it has all the same options and features but
is invested in unit linked funds rather than a with profits
fund. The initial pension and future income levels are also
dependent on the performance of the underlying unit linked
funds.
Often the investor is allowed to assume a future rate of
growth. The higher this assumed rate the greater the initial
income, however if the actual growth does not match this
rate then the amount of pension payable will decrease.
Tax Free Cash
Tax free cash must be withdrawn at outset then the residual
fund is exchanged for a series of payments. Once an annuity
has been purchased there is no further entitlement to
tax-free cash.
Income
Annuity payments are taxed in the same way as described
under ‘Traditional Annuity’. Income will increase or
decrease in payment depending on fund performance relative
to the assumed growth rate.
Death Benefits
The option of what type of death benefits to include must be
made at outset. The options available are the same as under
the Lifetime Annuity.
Advantages
● You will receive an income for
life, and you can elect for your spouse/partner to receive
an income or lump sum less tax upon your death.
● Tax-free cash is available at
outset.
● The contract is simple to
understand and there is minimal paperwork needed to start
the payment of benefits.
Disadvantages
● The selected income level is
not guaranteed and is subject to future investment returns.
● Charges will be higher than
under a ‘Traditional Annuity’.
● Any options to provide
benefits on death must be selected at outset and will result
in a lower initial pension payment. These selected benefits
cannot be altered in the future.
Suitability
Unit Linked annuities are most likely to suit individuals
who want some guarantee on their pension payments but also
want the potential to benefit from future investment return.
They therefore suit individuals with low to medium attitudes
to risk and security. They also suit individuals who have
relatively small pension funds and who will be heavily
reliant on their pension income.