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Variable and investment-linked annuities

Variable annuities offer a regular income that varies according to the performance of underlying assets. The most common type of variable annuity is the investment-linked annuity.

How do investment-linked annuities work?

An investment-linked annuity means that your retirement income can go up or down, reflecting the value of underlying stocks and shares. This means exposing your retirement income to risk; find out more about investment risk by visiting our guide.

There are two main types of investment-linked annuity:

  • With-profits annuity: your money is invested in the provider's with-profits investment fund. This means that there is the potential for extra income in the form of 'bonuses' if the fund performs well.
  • Unit-linked annuity: your retirement income is linked to specific funds you have invested in – you will have to choose from a range of funds, each investing in different assets and with varying levels of risk.

All investment-linked annuities have a guaranteed minimum income; you should check whether you could afford for your retirement income to fall to this level before you proceed.

As with other types of annuity, you can opt to have a single or joint annuity, and may qualify for an enhanced annuity if you have certain health problems. Not all providers will offer these specialised annuities, so if you need an enhanced annuity you should compare the market carefully.

Investment-linked annuity charges and advice

The fees and charges for an investment-linked annuity will eat into your retirement income, so you should make sure that any potential growth will outweigh these costs.

You should consider taking financial advice when making key decisions about retirement income. Because investment-linked annuities come with more risk than standard annuities, taking advice can be especially important. Once you take out an annuity there is no going back, and making the wrong decision at this point could cost you dearly in retirement.

Last updated: 12 June 2015

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