Variable Annuities
One of the key attractions of investing
your retirement savings in a variable annuity or other investment-linked
retirement product is the possibility of receiving a comparable income at the
outset, with the potential for income increases to combat the effects of
inflation and the opportunity of ‘real’ growth.
With variable annuities, you still receive
some income guarantees, but these provide less protection than the guarantees
of conventional annuities. Guarantees cost money to provide, so the more
guarantees included, or the higher their level, the more the cost. With
annuities, this cost can be seen in the rate of income on offer. For example,
to include guaranteed protection from inflation (linking conventional annuity
payments to the Retail Price Index) will reduce the starting income
substantially.
Keeping your options open also means that
as your needs and your dependants’ needs change, your choices can be changed to
reflect your new circumstances. For example, at an early age of say 60 you may
need to include protection for a financial dependant, which if bought via a
conventional annuity would mean a lower income for yourself. But, if later in
life you no longer need to include this protection, you can buy your annuity
without the insurance, which then provides a higher income.
Please note that some changes to the basis
of income payments may not be available or may be subject to qualification.
Variable products also provide investment growth potential. Choosing a
conventional annuity essentially means you are locking into today’s gilt yields
– this underpins the guaranteed income, but it also means you cannot
participate in any possible growth.
Fuelled by falling annuity rates
(principally due to lower gilt yields), alternatives to conventional annuities
have been available since the early 1990s. Their popularity rose slowly in the
early years. But, with growing market innovation and the advent of Income
Drawdown in 1995, the number of people buying them increased. This trend
continued until the early 2000s when the severe stock market falls were
probably the cause of a fall in popularity. In the recent past, the
alternatives to conventional annuities are again growing in popularity, as
shown in the graph below:
Source:
Association of British Insurers