Your income in retirement will be linked directly to the value of an underlying fund of investments. Generally, you can choose the types of fund, for example:
- Medium-risk managed fund where a fund manager selects a broad range of different shares and other investments;
- Higher-risk fund where a fund manager selects shares and other investments in a particular country or sector;
- Tracker fund (usually medium risk) which tracks the performance of a particular stock market index. Usually, these have lower charges than managed funds.
The more risky the underlying fund you choose, the more your retirement income may vary – both up and down. Some unit-linked annuities work in a similar way to with-profits annuities.
Your starting income is based on an assumed growth rate and if the fund grows at that assumed rate, your income stays the same. If growth exceeds the assumed rate, your income increases. If growth is less than the assumed rate, your income falls. A few unit-linked annuities let you invest in a ‘protected fund’ which limits the fall in your income. Most unit-linked annuities do not guarantee any minimum income. Even if your income is based on an assumed growth rate of 0%, your income could still fall if the value of the underlying investment fund falls.
If the underlying assets are equities, the income payments made are likely to be more volatile compared to a with profits annuity. Although in the long term equities have produced the greatest returns, there is no guarantee that this can continue in the short term.