Alternative Solutions: Variable Annuities

When is an annuity not an annuity?

The answer is when it’s called a variable annuity. These products originated in the US, but don’t really qualify as an annuity in the UK.

Nevertheless, these products can provide a guaranteed income for life just like an annuity.  They also allow you to invest some of your money in equities. They sound a little like flexible annuities, but there are differences.

How do these products work?

These products pay a guaranteed income (commonly around 4% of your capital at age 65), but still allow you to invest in a mix of equities and other investments.  On the face of it, this would appear to offer the best of both worlds: Exposure to equity markets with a guaranteed income. It also means that your income can increase over time if your funds perform well.

Unfortunately, there is no such thing as a free lunch and these products are no exception:

    • The starting income is usually less than a level conventional annuity
    • The charges are considered high by many experts
    • Even if your funds rise in value, you will only receive an increase in your income if the amount of your fund at the beginning of the year is higher at the end of the year AFTER income payments and charges have been deducted.

Let’s just consider that last point. If your fund is £100,000, your guaranteed income is 5% and the total charges are 2%, then your fund would have fallen to £93,000 at the end of the year if there is no growth in your investment. Even if you earned 6% on your investments, your income wouldn’t be increased, because your fund at the end of the year would still be less than at the start of the year.
However, if the returns on your fund are high enough to lead to an increase in income that increased income may then become your new guaranteed level (depending on the precise terms of the contract which can vary between insurers).

If this product is of interest to you, we recommend you seek Independent Financial Advice