Home Personal FinanceMaking Money What is an Investment-backed annuity?

What is an Investment-backed annuity?

by Dave

The annuities market is one that can be incredibly overwhelming, especially if you are looking at the number of different options which are available. Finding the right type of annuity can be a challenge and in many cases enlisting the help of a professional financial advisor is a great way to start this process. If you are looking to get a little bit more back than you would from a traditional annuity then you might want to look at the options that are on the table. For most people considering an annuity, an investment-backed annuity is a very real opportunity to make a little extra cash and help your annuity fund grow over time.

What types of Investment-backed annuity are available to me?

  • Unit-Linked Annuity

The Unit-Linked Annuity offers the potential for the highest return of all annuities, but they also involve the greatest risk and rarely have a base level for investment. If you are keen to take a risk with your investments then this could be a good option for you, but you also need to be aware and prepared to realise that with this element of risk comes the possibility that your investments could significantly drop as well.

  • With Profits Annuity

This happens when your income is linked to the With Profits fund of your chosen insurer. This is a more stable approach to investment-backed annuities as only a bonus is paid each year. This ensures that if one year the fund performs better than another, money is kept in reserve to try and cover any poor performance periods. This can help to stabilise your income to some extent.

Why might an investment-backed annuity work for me?

Investment-backed annuities allow you to have flexibility over your annuity investment while still assuring you of a base level annuity income even if the market were to perform poorly. This can also be used as a great alternative to an inflation-linked annuity and growing investments can help to combat the side effects of inflation which could benefit you for many years to come. In addition, if you do find that this type of investment isn’t for you then you may decide to switch back to a traditional annuity, although there could be a fee to do this.

Although the money that you receive now could cover you quite comfortably don’t forget inflation – in twenty or thirty years your money could quite easily be worth half what it is now.

Sounds good… but is there a risk?

Although annuities are often seen as a safe source of income, there is an element of risk associated with this type of investment and the main one is that you aren’t guaranteed a certain level of income each year making it incredibly hard to budget and plan your life around this source of income. Although you will receive an income each year, the amount is very dependent on the market and could be very different year-on-year depending on how the market performs in relation to your investment.

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