The importance of choosing appropriate funds

Today, with life expectancy increases now fully factored into the pricing of conventional annuity rates, as well as continued low gilt yields, the relevance of investment-linked retirement solutions is as great as ever.

If their popularity waned due to falling stock markets, this is a pity. Because, buying into the alternatives to conventional annuities when markets are low can turn out to be a sensible choice. And, by investing in a range of assets, you can provide greater protection against asset classes performing badly. This is best illustrated by an example as shown above.

The low volatility shown in the graph is due to the nature and operation of With Profit funds. It should be noted that volatility and performance are dependent on the type of fund or funds selected. With Profit funds aim to even out the income payable over several years by retaining money (in the fund) in years where performance is good, in order to subsidise income payments in years where the investment returns are poor.

Given the wide choice available, matching your risk profile to the appropriate range of asset classes and your objectives is paramount. Choose too conservatively, and your growth objectives may not be achievable. Choose too speculatively, and you may have sleepless nights regarding their volatility!

The graph above provides an example of the potential annual income payable, for someone aged 75 in 2007, who bought an Investment Linked Annuity in 1992. This illustrates how a smoothed income can be achieved – even when stock markets were falling around the world.

The example is based on man aged 60 buying a With Profit Annuity in March 1992. Monthly income with 0% Assumed Bonus Rate at the outset and throughout. Source: Prudential.